Cambodia’s Economic Recovery Hinges on Addressing Inequality and Diversification
- Gerald Flynn
- 27/07/2020 9:47 AM
Developing an effective social safety net, widening the economic base and making a concerted effort to formalize the businesses of the nation’s poorest are all crucial to a post-pandemic recovery.
PHNOM PENH--Cambodia's ability to survive the economic fallout of the Coronavirus Disease 2019 (COVID-19) pandemic will be determined by how rapidly it can come to the assistance of its poorest and most vulnerable citizens, experts have advised. COVID-19 has claimed no live in Cambodia, but it has highlighted glaring vulnerabilities in the structures that have helped to bring about a 7 percent average annual growth in the economy for almost a decade. This year, Cambodia faces its worst economic performance since 1994.
By the government’s own estimations, the economy is set to shrink by 1.9 percent in 2020 as the impact of the pandemic sets in. This alone would be far worse than the 2009 financial crash, where Cambodia’s GDP hovered around 0 percent growth, but never dipped into negative figures. However, the government’s estimations seem wildly optimistic when contrasted against those projected by the Asian Development Bank (ADB), which are suggesting that Cambodia’s economy will contract by 5.5 percent this year. Similarly, the ADB warns that some 390,000 jobs could be lost in Cambodia as a direct result of the pandemic.
While the Labor Ministry’s spokesperson Heng Sour confirmed that the government has not yet produced an accurate picture regarding unemployment, he said he expects the National Institute of Statistics to have an analysis completed by next September.
What is apparent is that roughly 150,000 garment workers employed across some 400 factories have been suspended to varying degrees, more than 100,000 Cambodians working in the tourism sector have lost their jobs after tourism figures for April 2020 plummeted by more than 99 percent compared with last year and key export markets in the United States and the European Union continue to be ravaged by the COVID-19 pandemic.
The great unknown, however, remains how badly the pandemic will affect Cambodia’s widespread informal economy. In May 2020 the International Labour Organization (ILO) warned that more than 1.6 billion people working in the informal sector worldwide will be significantly affected by the pandemic, adding that many of them fear starvation more than COVID-19.
Cambodian workers exit their factory as they take a lunch break in Phnom Penh on March 2, 2020.
Chea Layhy of the Ministry of Industry noted that small to medium enterprises (SMEs) make up 99 percent of all Cambodia’s businesses, but alarmingly best estimates suggest between 90 and 95 percent of them are unregistered. This renders the task of assessing the economic impact on a large part of Cambodian society all the more difficult.
Although as of July 25, Cambodia has only recorded 225 cases of the coronavirus and so far no one is reported as having died from COVID-19, while the handling of the pandemic has—from a health perspective—been successful for the most part, the road to economic recovery is fraught with internal and external challenges.
Diversify the Economy and Climb the Value Chain
“Cambodia is a little bit shell-shocked,” explained Sunniya Durrani-Jamal, country director of the ADB in Cambodia. “Like a number of economies, it’s a very open economy, it’s very dependent on exports…but that is not to say we don’t see the economy coming back up.”
Having launched a $250 million loan program for Cambodia on July 8, Durrani-Jamal noted that the ADB is not just providing financing, but also technical assistance and advisory services. She has identified several key areas for improvement, chiefly diversification, greater support for small-and-medium-enterprises (SMEs) and a stronger social safety net.
“I think it’s very important to get the SMEs and the farms back on track,” she said. “We’re working on a guaranteed scheme with the government, which can supplement the money they put in.”
This new scheme is designed to offer more confidence to Cambodia’s finance sector in issuing bank loans, particularly to new businesses but, as Durrani-Jamal notes, it’s the type of businesses that needs to change.
“We have been advising on [diversification] for a long time, most recently in our October 2019 country partnership report, competitiveness and diversification, a better focus on inclusion, making sure people have access to the right skills as well as access to health—those fundamentals remain,” she explained.
Sunniya Durrani-Jamal, country director of the ADB in Cambodia, speaks to journalists during a conference in April 2019. (Photo: Phoung Vantha)
“But the economy can’t go from A to Z in a short time,” she said, adding that Cambodia has a better chance of success by climbing the value chain within existing industries.
“For garments, rather than producing just simple items of clothing, Cambodia should move towards more sophisticated products and capture more of that market,” noted Durrani-Jamal. “That is a key issue—the garments available in Sri Lanka are very different to the ones you can get in Bangladesh.”
Tourism is another sector that needs greater diversification according to Durrani-Jamal. She noted that Indonesia had successfully developed Bali as a destination that—while not without its troubles—has become the bedrock of Indonesia’s tourism sector.
“Why can’t Cambodia develop some kind of unique city or destination beyond Angkor Wat? They need something that resonates with people when they think of Cambodia,” she said, pointing to the level of private sector investments in Bali, along with the international coverage it receives in terms of branding.
This, she mused, is something that Cambodia should consider, but added that the development of new destinations and higher value tourism products is part of the ADB’s work with Cambodia.
Durrani-Jamal went on to say that Cambodia’s foreign direct investment (FDI) needs to be diversified—rather in terms of usage more than origins. With China providing 43 percent of the $3.6 billion of FDI Cambodia attracted last year, there is certainly room for more players to invest in the country’s economy, but of particular concern to Durrani-Jamal is the purpose of this FDI.
“The fact that most FDI is going into construction and real estate is a cause for concern,” she said. “We would like to see more manufacturing, more investment in tourism—again diversification is important here too—likewise, a diversification of investors which would indicate a broader confidence in the economy.”
Cambodian Investments in Cambodian Products
Senior researcher at the Asian Vision Institute—a Cambodia-based think-tank—Chheng Kimlong said that the recent closure of borders and restrictions on travel due to the COVID-19 pandemic has seen an uptick in domestic investments.
“We’ve seen more investment from local investors who have been purchasing technology from China and Japan over the last few months,” he said, arguing that a reduced flow of goods from neighboring Thailand and Vietnam has led to more local innovation.
“There’s been an increased interest in food processing,” Kimlong explained. “So the local economy will depend much more on local products in the future, but they will not replace Cambodia’s dependency on imports—our productivity is still very low. We need more high-efficiency machinery and tools, more skills.”
This, he suggested, could help to displace some of the imported goods that Cambodia is still dependent on. Cambodia is still importing between 200 and 400 metric tons of fruit and vegetables every single day, with Vietnam providing roughly 60 percent of this volume. Meanwhile the Cambodian Livestock Association announced on May 28 that Cambodia is still spending in excess of $1 billion on imported meats and vegetables, citing the lack of a sophisticated infrastructure to support a stronger domestic industry.
“If we talk about diversification as a whole, it’s growing at a very slow pace,” conceded Kimlong. “Maybe for one or two reasons—domestic investors are not interested in the diversification of the economy, or they are interested but lack the capital and the connections to export markets that would be needed.”
While Kimlong praised the recent efforts of the government to diversify export markets that Cambodian products are bound for, he warned new free trade agreements with existing partners still leave the economy vulnerable to global crises.
“Domestic entrepreneurship and entrepreneurial capacity of local SMEs will remain the major foundation for the economic recovery and the country’s prospects for growth,” he said, adding that more needs to be done to protect Cambodia’s economy from external shocks. One means of doing this, he explained, is to loosen the bureaucratic ties that bind.
Social Inclusion and Access to Success
“The government needs to provide more favorable conditions for entrepreneurs, for investors—both domestic and international,” he stressed. “They need to cut through the red tape, the bureaucracy and anything that holds up the investment process—it needs to be faster, cheaper and more efficient.”
The 2019 Global Competitiveness Report published by the World Economic Forum ranked Cambodia as 106th out of 141 countries analyzed, citing weak institutional governance, low levels of skills development and innovation capacity as glaring flaws in the Cambodian economy.
“Led by Singapore, the East Asia and the Pacific region is the most competitive in the world, followed by Europe and North America,” the report reads. “Hong Kong SAR (3rd) and Japan (6th) also feature in the top 10. Viet Nam (67th) is the country whose score improves the most globally. But the region is also home to economies with significant competitiveness deficits, such as Cambodia (106th) and Lao PDR (113th).”
The report found that on average it takes 99 days to open a business in Cambodia, underscoring Kimlong’s concern over the level of bureaucratic barriers to entry.
“The ability of SMEs to grow and to prosper will be the impetus for economic growth in Cambodia,” stated Kimlong. “Secondly, a solid SME foundation would help protect Cambodia from further external shocks; recessions, pandemics, global or regional crises etc., but a strong foundation of entrepreneurship in SMEs could counteract all of those.”
On this point, Durrani-Jamal at the ADB agreed, pointing to the need to simplify the process of formalizing a business in Cambodia and the socio-economic benefits that stood to be gained from doing so.
“To be eligible for any government scheme that will support businesses [during the COVID-19 pandemic] they need to be registered, so we’re trying to get these businesses registered, but it means creating structures for them to be able to do it affordably,” said Durrani-Jamal, who added that the majority of SMEs in Cambodia are women-led.
The ILO found that 65 percent of all businesses in Cambodia are run by women, but that they are less profitable, smaller and more likely to be informal businesses than those run by men. By contrast, some 57 percent of Cambodian women are working in what is considered “vulnerable” employment—just 40 percent of men face the same risks, according to the ILO.
“Vulnerability in Cambodia is reinforced structurally by the narrow base of the economy, which remains dependent on the garment export sector, tourism, rice and construction, with export markets falling within a narrow range,” the ILO’s Decent Work 2019-2023 report reads, adding that a failure to diversify industrial production has created a low-wage, low-productivity growth model that is extremely vulnerable to shocks.
Poverty in a Pandemic
The shock has arrived in the form of the COVID-19 pandemic and, despite prior warnings on the need to address economic issues, Cambodia has been woefully underprepared for the fallout of such an unprecedented crisis.
“Over time things will formalize,” said Durrani-Jamal, who remains optimistic about Cambodia’s economic resilience. “We’re working on a project with women-led SMEs. It’s just in the concept stage at the moment, but it’ll involve a lot of impact funds and so far it’s given us some good insights into the issues women in business face.
“Right now though, unemployment is the problem and so we’re aiming to help keep them afloat,” she said, adding that short-term solutions to Cambodia’s economic collapse are crucial.
A woman rides her bicycle past graffiti along a street in Phnom Penh on July 2, 2020. (Photo: AFP)
Kimlong highlights the difficulties of creating policies to help businesses that exist outside of the formal environment.
“In regard to government intervention, vulnerable people, SMEs, even major SMEs and businesses that are on the brink of bankruptcy or have already shut down: These are the people the government should be helping,” he said. “But it’s a very difficult task for the government to identify the right people. Sometimes, the private sector tries to take advantage of these interventions, so it’s very challenging for the government.”
This, Kimlong said, is why the government has been reluctant to make an announcement on how to help the informal sector—the lack of formal documents renders them ineligible for government support, yet the same governmental bureaucracy keeps them from accessing the formal documents needed.
Slipping Through the Safety Net
The outgoing United Nations Special Rapporteur on extreme poverty and human rights, Philip Alston lamented the illusion of progress in the fight to eradicate poverty in his final report, submitted this year on July 2. His report lashes out at the “triumphalist” narrative that extreme poverty is being eradicated globally, arguing that the World Bank’s measurements of poverty have been misappropriated and that the past three decades has seen little progress, with millions of people globally still facing few opportunities, countless indignities, unnecessary hunger and preventable death.
“COVID-19 is projected to push more than 70 million additional people into extreme poverty, and hundreds of millions more into unemployment and poverty,” Alston said in his last report. “More than 250 million people are at risk of acute hunger. Poor people and marginalized communities have been the hardest hit in almost every country, both in terms of vulnerability to the virus and its economic consequences.”
Alston railed against the failure of nations around the world to develop social safety net that could have prevented so many people from falling through the cracks in society. In Cambodia however, such a net is almost non-existent.
A Cambodian scavenger pulls her cart loaded with the recyclable materials pass the Independence monument in Phnom Penh on October 17, 2019.
“The first priority policy for Cambodia is to ensure the well-being and social protection of the most vulnerable working class and poor communities throughout the country,” said Khun Tharo, program coordinator for the labor rights advocacy group CENTRAL.
There is a clear need for more government action given the severity of the COVID-19 economic fallout in Cambodia, he said, adding that there should be free access to healthcare and a stronger, more effective cash-transfer program.
“Interventional policies must support the mechanisms that strengthen the social protection policy and expand its coverage to workers in the informal economy, as well as those in need of emergency aid assistance and the most vulnerable communities,” Tharo said. “The government has been… very slow to address these issues since the beginning of the outbreak.”
Cambodia’s government has rolled out a range of financial relief programs over the past few months, but all rely on the IDPoor program, an initiative that depends on the integrity and accountability of village chiefs, who are often closely aligned with the ruling Cambodian People’s Party—prompting Prime Minister Hun Sen to warn them against abusing the system.
Despite support from the governments of Germany and Australia, along with the United Nations Development Programme, just 562,686 families have so far been identified as needing financial support from the government.
“That is just a small portion of the people who should be supported, also the amount, $25 million per month: It’s not much to support the number of people who need it, but it still helps,” said Kimlong of the Asian Vision Institute.
While he praised the government’s short-term solution, he warned that cash-transfers alone will not be enough. “The best way to help the people is to provide them with opportunities; opportunities for employment, for better skills, so that they won’t be laid off, so they can get better jobs and can avoid falling back into the trap of poverty,” Kimlong said.
An Investment in People is an Investment in the Future
While IDPoor remains one of the few safety nets available for Cambodia’s poorest, the security it offers is minimal. Families who are successfully identified by their village chiefs and receive an IDPoor card can expect to see between $4 and $30 per month in support from the government and Hun Sen has previously stated that the program may only run for two months.
“It’s absolutely fundamental to get a safety net,” said Durrani-Jamal of the Asian Development Bank. “The best way to do that is to create an environment that allows them to get jobs—that’s best for people and the economy. Private sector development is very important, but when you have a situation where people are temporarily out of jobs, then you need systems that allow them to get income support: That’s why you need companies and employers paying into a social protection system.”
While noting the imperfections of the IDPoor program, Durrani-Jamal sees it as the building blocks to form the foundations of a much more robust pro-poor safety net.
Students walk on the grounds of a primary school as the government announced the closure of education institutions over the outbreak of the COVID-19 coronavirus in Phnom Penh on March 14, 2020. (Photo: AFP)
But, she said, it’s still early days for Cambodia. “Obviously, the government has previously, because of growth, never felt they needed a system like this. But COVID-19 has shown a spotlight on this issue,” she explained, added that something affordable for the country was needed.
Durrani-Jamal went on to say that perception is key and that people—businesses in particular—need to stop viewing social protection as a handout.
“This is an investment in your most valuable resources: people,” she said, “It’s not a handout, it’s something that people can contribute to in good times, like an insurance policy. So when you need help in the bad times, you can get it.”
However, Durrani-Jamal added, the current strains on Cambodia’s economy may make this impossible for some time. “At the moment, the whole economy is struggling,” she said. “So we have to do cash-transfer programs for now. But beyond that, we need to look at how to help people get back on their feet and stand up on their own: It’s investing in the future.”