Ashley Hajimirsadeghi

Intro Development Economics

Professor Emre Ozsoz

On Development in Cambodia

1. Introduction

Formerly a French colony until it gained independence in 1953, Cambodia now is a

developing Southeast nation that shares its borders with Laos, Vietnam, and Thailand. The

population of the country now stands at roughly 16.4 million people, the majority of which are

Khmer. Roughly 97.6% of the population is Khmer, while other minorities include individuals of

Cham, Vietnamese, and Chinese descent. 97.9% of the population is Buddhist, but the other two

religions that hold a significant population are Muslims (1.1%) and Christians (0.5%) (The

World Factbook: Cambodia).

Cambodia reached lower income status in 2015, thus making the country less eligible to

receive international aid from organizations like the International Monetary Fund and the Asian

Development Bank (Cambodia Economic Update). It is said to be the sixth fastest growing

economy in the world. However, it continues to be plagued by a lack of proper infrastructure, the

rising gap between the poor and the rich, and corruption within the government.

In recent history, Cambodia is still recovering from their Holocaust in the mid-1970s.

Thousands of Cambodians became refugees to neighboring Southeast Asian countries due to the

actions caused by the militant Khmer Rouge regime, a government that ruined any infrastructure

Cambodia had. There were no financial institutions, no schools, few doctors and teachers that

survived, and no forms of sanitation or clean water left. Cambodia, essentially, had to rebuild

everything since then (Cambodian Communities Out of Crisis).

 2. Current Economic Climate

In its current economy, Cambodia utilizes a mixed economic system. Part of the economy,

specifically the markets, is planned and regulated by the Cambodian government, while

individuals also retain private ownership of businesses and goods. Previously, until 1995,

Cambodia followed the planned economic structure, but as the textiles, tourism, and construction

sectors grew, it shifted to more of an open market economy (Sawe, B. E., 2017).

From 2000 to 2010 alone, the GDP of the nation grew from at an average annual rate of 8%;

the number predicted for the decade following after (2010-2020) is predicted to be around 7%

(The World Factbook: Cambodia). In a forecast for the remainder of 2019, Cambodia was ranked

the highest growing Southeast Asian GDP; it was predicted to have that 7% increase in GDP,

while the second highest growing GDP economy was Vietnam at 6.8%. However, Cambodia

ranked fifth in per capita GDP growth rate—it had a prediction of 4.4% while Vietnam’s, the

highest ranked SEA nation, had 5.8% (Cambodia: Economy).

 Figure 1. Contribution to Real Growth (2017) via the Cambodian Economic Update

While the Cambodian economy is seeing a gradual decline in real growth, as seen in

Figure 1, Cambodia’s key exports are textile and apparel, footwear, and bicycles. As tourism

increased and exports continued to thrive in the Cambodian economy, poor households in the

country saw the effects of these changes in their incomes. Minimum wages for workers in the

garment and footwear sectors saw an increase of 11% from 2017, while inflation is low, keeping

goods affordable for the Cambodian lower class.

 Figure 2. Rising Salary and Wage Income of Rural Households via World Bank Data

However, Cambodia lacks diversification in their key exports. According to the Atlas of

Economic Complexity, the vast majority of Cambodian exports lies in three sectors: services

(with the breakdown being within travel and tourism), textiles, and agricultural products

(SOURCE: Atlas of Economic Complexity). Their exports in textiles and agriculture are

considered to be low complexity products, as they don’t require much skill to make and can be

made/grown quite easily. In contrast, real estate and construction are booming domestic

industries.

3. Current Political Climate

From 1975 to 1978, Cambodia was under control of the communist radical Khmer Rouge,

who committed their own version of Mao Zedong’s The Great Leap. During this time period,

roughly two million people were brutally murdered or killed in the name of the nation’s progress

(Cambodia Country Profile). Now, since the signing of Paris Peace Agreements in 1991, the civil

war in Cambodia may have ended but corruption is still rampant among the ruling Cambodian

People’s Party.

In 2017, the Cambodian People’s Party amended a law stating they had the right to move

authority to the Ministry of Interior to dissolve any opposing political parties who appeared to

threaten national security. The United Nations Human Rights office protested this, as it appears

to consolidate power to the CCP (Politics and Society in Contemporary Cambodia). Then, also in

2017, the only major opposing party to the CCP, was dissolved by the Cambodian Supreme

Court (Cambodia Country Profile).

 The Prime Minister, Hun Sen, is known to utilize violence, intimidation, and bribery in order

to keep power to the CCP, which dominates most seats in the Cambodian Parliament. He

currently is one of the longest serving Prime Ministers in the world; he started being active in

Cambodian politics in 1985.

This corruption bleeds into the business sectors. Land previously owned by Cambodian

farmers the government and rich stakeholders sold to foreign and local companies, thus stripping

away the property rights of Cambodian farmers. Cambodia’s poor have been forced to relocate to

urban centers in order to make a livelihood, however, these people are not educated (Politics and

Society in Contemporary Cambodia). On a Corruption Perception Index, Cambodia has

previously ranked 161 out of 178 nations, thus exposing the widespread views of corruption in

the government (Cambodia).

4. Challenges Faced

It is reported by the Asian Development Bank that the population of Cambodians that live

under the poverty rate has decreased to 13.5% in 2016, but that number is still relatively high.

The main demographic of the nation are youths; over 50% of the total population is under the

age of 25, while the nation lacks infrastructure and educational opportunities for these youths

(The World Factbook: Cambodia). The problem worsens in the countryside; youths in these

areas often remain out of school and lack the resources and time needed to foster growth.

While net enrollment in primary education jumped from 82% in 1997 to 97% in 2016, the

rate of completion for lower secondary school, reported to be 57% in 2017, still is “significantly

below the average for [other] lower middle-income countries” (Cambodia Economic Update).

Another key issue that plays into this is the massive human trafficking issues present in the
country. Cambodian men, women, and children in the countryside often are targets for human

trafficking, whether it be domestic servitude, sexual exploitation, or forced labor (The World

Factbook: Cambodia).

In 2017 textiles composed roughly 67% of Cambodian exports, thus suggesting a lack of

diversification of exported goods. Cambodia may lose its comparative advantage in textiles in

the coming years, as the lack of investment in job sectors might discourage companies, and the

nation runs a current account deficit above 9% (The World Factbook: Cambodia). As the

economy is so reliant on the textiles and garment industries, if something were to happen to any

of those industries, the Cambodian economy would collapse.

Figure 3. Cambodia’s Net Trade Flow via Atlas of Economic Complexity

As Cambodians move from the countryside to cities in order to find work, thus showing their

shift from a more agricultural-based society to a more factory and industrial based one, overall

wages in the country are increasing. However, as the real wages are seeing a sharp increase in
value, the appeal of cheap labor in Cambodia is being threatened. Cambodia is seen as appealing

due to the rising cost of labor in China, as well as recent embargoes and trade tariffs placed on

the Chinese factories and government, but this appeal can be easily lost in the long run,

especially if wages are rising (Furusawa, 2017).

In regards to the construction and real estate boom that Cambodia has seen in recent years,

growth in credit to these sectors is relatively high, thus leaving the country’s economy

vulnerable. A large part of this credit is financed by foreign sources and the influence of micro-

finance organizations has risen among the past couple of years. Combined with a rapid

expansion of the banking credit system, Cambodia could potentially find its macroeconomic and

financial situation to be threatened in the near future (Turunen, 2017).

Another big challenge Cambodia faces is climate change. Currently, Cambodia is considered

to be one of the most vulnerable countries in the world to climate change due to its reliance on

agriculture. Due its geographical location, the country is exposed to the biggest effects of

monsoons, and with the changing weather, more severe droughts and floods will ruin crop yields.

The UNDP reported that roughly four hundred thousand Cambodians, out of a population of

fifteen million, will be affected by climate change (Underprepared Cambodia Vulnerable to

Climate Change).

5. Solutions

In regards to Cambodia’s current political and socioeconomic climate, this is what could be

implemented to improve the status of the country. Agriculture is still a leading industry in

Cambodia, as there is a lack of urbanization and drive to education the farmers, and rice, corn,
and cassava are leading exports from the agricultural sector (SOURCE: World Atlas). While

agriculture and textiles are dominating, Cambodians need to diversify their exports.

The Cambodian government should highly consider investing more on the education of its

citizens. If children were in schools and not out working in the fields and factories, the risk of

them being kidnapped and sold as child laborers abroad in the neighboring countries is lower. By

being in school and gaining an education, these students could then go on to help promote

industries that are not textiles or agriculture. This will help foster a culture of competitiveness,

and of entrepreneurship, thus enhancing Cambodia’s economic status on the global stage.

As previously stated, the rich stakeholders are buying out the land that farmers traditionally

occupied in the country, thus forcing them to migrate to more urban centers, where the

manufacturing industries (specifically for textiles) are located. These farmers are unskilled and

uneducated, so, of course, they will flock to these textile jobs because they lack qualifications for

any other job or opportunity. If these citizens were to gain an education, they would be able to

help diversify Cambodia’s portfolio of exports and increase revenues in other industries. By

investing in human capital, Cambodians will seek out more opportunities to improve the

country’s status.

The Cambodian government also needs to begin investing in the country’s infrastructure. If

Cambodia continues to be reliant an agrarian based economy, the threats of climate change loom

over the country. According to World Bank, roughly 90% of Cambodia’s poor population lives

in rural areas outside of urban centers and relies on agriculture. However, the country still lacks

proper sanitation methods, irrigation for crops, and even basic transportation methods, from

paved roads to on-land or over-sea shipping, which with government funding can completely

change the situation for Cambodia’s rural population.

 According to the International Monetary Fund, Cambodia has high energy costs, an

inefficient supply of energy, and a transportation network that lacks. Cambodia also ranks quite

low on the list of Southeast Asian countries to do business with, as government procedures are

quite extensive, thus decreasing competitiveness overall (Furusawa, 2017). By investing in

infrastructure, making more efficient ways to consume energy that lowers cost while not

exhausting the supply, and funding the pavement of roads and usage of water channels for

shipping goods, Cambodian business owners can take less risks with shipping their goods and

will be encouraged to do more business transactions.

In regards to the extensive procedures to do business, the government needs to foster an

environment that encourages Cambodian businesses to thrive. I suggest passing legislation that

makes it easier to run a legitimate business in the country while still having government support

with some regulation. This will encourage every day Cambodians to start their own businesses

rather than take those textile or manufacturing jobs. By starting initiatives that encourages

entrepreneurship, Cambodians could see the income gap start to gradually close.

6. Conclusion

Cambodia, despite its rapid growth in the past decade, is still quite susceptible to many

external and internal threats. In order to improve its economic situation, it needs to start investing

in human capital and infrastructure, as more than 60% of the Cambodian economy relies on two

categories of exports. The government must overcome its corruption, extensive regulations, and

the migration of the uneducated rural poor to cities to improve the status of the country.
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