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Reviews of Cambodia’s Development in the Post-Graduation Scenario

SOKHA PHOM PENH HOTEL & RESIDENCE, 17-18, 2017

KIM VEARA, LECTURE AND RESEARCHER, FACULTY OF DEVELOPMENT

STUDIES, ROYAL UNIVERSITY OF PHNOM PENH

Strengthening Development of Least Developed Countries

in Asia and the Pacific to Support Implementation of the

2030 Agenda for Sustainable Development

Outlines

Overviews

Progress of Cambodia in Implementing the Istanbul Program of Action and the 2030 Agenda for Sustainable Development

Development Priorities and Challenges of Cambodia – LDC Graduation and Policy Alignment with IPoA and 2030 Agenda

Potential Role of Development Cooperation – East and North East Asia (China, Japan, Republic of Korea and the Russian Federation) – In Supporting the Implementation of IPoA and 2030 Agenda

How Regional Economic Cooperation and Integration, Including ASEAN, Can Enhance Cambodia’s Progress in the Post-Graduation Period

The Way Forward

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Overviews: GDP and GNI Per Capita Growth

300 310 320 350400

460520

590670 700

750810

880960

10201070

1140

8.88.1

6.6

8.5

10.3

13.3

10.810.2

6.7

0.1

67.1 7.3 7.4 7.1 7 6.9

0

200

400

600

800

1000

1200

0

2

4

6

8

10

12

14

GNI Per Capita GDP Growth

GN

I P

er

Ca

pit

a (

$)

Source: Author’s Illustration Based on World Bank’s Data 2017

An

nu

al

Gro

wth

Ra

te

Overviews: Poverty Reduction and Gini Index

0.380.41

0.38 0.34 0.34

0.31 0.29 0.27 0.295

53.2%47.8%

29.9%

22.9% 21.1% 19.8% 18.9%16.0% 13.50%

2004 2007 2008 2009 2010 2011 2012 2013 2014

-- Gini index - Poverty Rate

Source: Ministry of Planning, 2017

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Overviews: Cambodia LDC Graduation Status

Gross National Income (GNI) Per Capita

Inclusion: 1,035$

Graduation: 1,242$

Income-only: 2,484$

Human Assets Index (HAI)

Inclusion: 60 or above

Graduation: 66 or above

Economic Vulnerability Index (EVI)

Inclusion: 36 or below

Graduation: 32 or below

2015 Data

Progress of Cambodia in Implementing the IPoA and the 2030 Agenda for Sustainable Development: Goal 1 (Zero Hunger) (1)

Indicator

2015

Baseline

2018

Target

2023

Target

2025

Target

Prevalence of food shortages and hunger

• Global Hunger Index (GHI) International Food Policy Research Institute and

UNDP HD Report

22.6

• Food Consumption Score (FCS): HHs with acceptable food consumption (CSES

2014)

90.7

Malnutrition Prevalence Rate (%)

• % CU5 moderately/severely stunted (height for age<2SD) 32 25 (2020) 20

• % CU5 moderately/severely underweight (weight – age<2SD) 24 19 (2020) 14

• % CU5 moderately or severely wasted (weight - height<2SD) 10 7 (2020) 5

• % CU5 with anemia (Note: A great percentage of anemia has genetic causes. 56 50 (2020) 40

• % CU5 with vitamin A deficiency 9 8 (2020) 7

• Rate of thinness, women aged 15-49 (BMI<18.5 kg/sq. meter) 14 7 (2020) 5

• % of women aged 15-49 with anemia (Note: A great percentage of anemia

has genetic causes.

45 35 (2020) 30

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Progress of Cambodia in Implementing the IPoA and the 2030 Agenda for Sustainable Development: Goal 8 (Decent Work and Economic Growth) (2)

The National Employment Policy (NEP) 2015 – 2025 was developed in 2015, a framework that include inclusive and sustainable employment growth; skills development and human resources; and labor market governance, which engage in Decent Work Agenda.

Falling independency ration from 1994 to 2014 and more than 50 percent of the total population aged below 25.

80.2 percent of respondents are very satisfied with their work but more than half of them did not see their current wages are enough to sustain their family (53.3 percent) (ILO, 2015).

Just over one in every ten children in Cambodia are engaged in child labor (NCLS, 2012).

Wages are the main condition to attract and retain workers. In addition, some people also looking at working time, health and safety, and social protection, especially health insurance and access to healthcare as well when decides to work for an enterprise.

Government to provide better wages and safer working conditions, and to create more jobs and better infrastructure in the economy.

Progress of Cambodia in Implementing the IPoA and the 2030 Agenda for Sustainable Development: Goal 9 (industry, innovation and infrastructure) (3)

Growth in Manufacturing

Manufacturing Value Added Share in GDP Manufacturing Value Added per CapitaManufacturing Employment as a

Proportion of Total Employment

2000 2015 2000 2015 2000 2015

11.5 16.9 49.0 171.6 7.0 10.7

Research and Development

Research and Expenditure as a Proportion of GDP (%)Researchers (Full-Time Equivalent)

(per million inhabitants)

2002 2015 2002 2015

0.05 0.12 18 30

Official International Support and Value Added of Medium and High-Tech Industry

Total Official Flows for Infrastructure

(constant 2014 $ million)

Proportion of Medium and High-Tech Industry Value Added in

Total Value Added (%)

2000 2014 2000 2013

48 212.6 - -

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Progress of Cambodia in Implementing the IPoA and the 2030 Agenda for Sustainable Development: Goal 16 (Peace, Justice and Strong Institution) (4)

The first kick off from 1993 situated significant changes in the political system, a market driven economy, democratization, development and poverty alleviation. Cambodia was both at peace and at war.

The Royal Government of Cambodia (RGC)’s first legislature (1993-98) could not give full priority to economic development, and poverty reduction, as it was required to combat the Khmer Rouge forces scattered across the country. The government had to focus on peace-building, state-building and rehabilitation.

TS focused on: (i) the restoration of peace and security; (ii) the integration of Cambodia into the region and the world; and (iii) the promotion of socio-economic development.

The successful implementation of this strategy enabled the RGC to restore peace and security, as well as political stability, and to begin rebuilding democratic institutions and administration reform.

Cambodia rule of law has been quite weak (World Justice Project 2016). Cambodia rule of law have moved down by 2 ranks, to 112 in the global ranking, scoring 0.33. In general rule of law trend is going down.

Progress of Cambodia in Implementing the IPoA and the 2030 Agenda for Sustainable Development: Goal 17 (Partnership for the Goal) (5)

Official Development Assistance: 1.34 billion in 2015

Internet Broadband subscribing per 1000 inhabitants: 5.33

International financing

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Priority 1: Infrastructure

The Rectangular Strategy III has emphasized on the importance of infrastructure for development. The construction of physical infrastructure has been further implemented with 77.4% of the total length of 5,600 Km National Roads provided with widened and asphalt-concrete pavements. Electricity supply reached 68% of the villages, nation-wide. Also there was remarkable progress in the development of irrigation, energy and telecommunications.

Continued investment in transport infrastructure and improving trade facilitation to develop a vibrant logistics system through the development of a multi-modal transport network system to ensure connectivity within the country and with other countries in the region and rest of the world; and to respond to urban development remains the priority of Cambodia.

The outcomes will include: (1) Lower transport costs; (2) Improved reliability and effectiveness; (3) Improvement in competitiveness; and (4) Increase in investment and trade.

An expansion of low-cost energy production and supply and distribution network, aimed at ensuring energy security, reliability and affordability to meet development needs should also deserve attention from policy makers and development partners.

Priority 2: Human Resources and Skills Development

The Industrial Development Policy 2015–2025 set out to attract new industries by encouraging FDI in the areas of machinery assembly and assembly of electrical appliances and transportation equipment; and through the promotion of SMEs in the area of medicine, construction materials, packaging materials, furniture (RGC, 2015). All of this requires skills development to staff and attract the new industries.

Skills development is essential for industrial diversification in the medium-term and to promote the comparative advantage of Cambodia in the long-run and to avoid the middle-income trap. In addition to the private sector, upgrading skills in the public sector will improve the capacity of government in economic management, growth facilitation and public administration for better governance.

The average educational attainment of the labor force is at primary and lower level of education. This low level of human capital is not sufficient to absorb, diffuse and implement new innovations and technology. This level of human capital will have long-run implications on the competitiveness of the Cambodian economy.

Given the structural changes in the economy, there are growing skills mismatches in the labor market. Due to the strong liberalization of the Cambodian economy, there is a growing demand for semi-skilled and skilled workers in the economy from the multinational activities.

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Priority 3: Diversification of exported products and marketsGarments and footwear were the only export from Cambodia. Industrial Development Policy 2015 - 2025 stresses on the “New Economic Growth Strategy” which stresses importantly on economic diversification, competitiveness strengthening, and productivity enhancement in line with the structural transformation of the domestic economy and the evolving global and regional economic architecture.

Industrial sector as a growth strategy priority aimed at promoting economic diversification, effectuating profound structural change and improving competitiveness.

It will enable the broadening of the existing economic structure, which depends mainly on manufacturing sector supported by a modern agriculture sector and a high value added service sector, in particular a developed financial sector, logistics and modern technology.

This structural transformation will ensure the sustainability and robustness of national economy with strengthened role of financial intermediaries, modernized logistic system and distribution channel, advancement in new techniques and technologies, as well as improvement in governance and capacity of public institutions in managing economic development.

Priorities: Export product diversification: from garment export to

rice and others (electronic components, bikes...)

Source: Ministry of Economy and Finance, 2016

14

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

94.8% 93.3% 95.3% 96.2% 95.8% 96.4% 96.3% 96.4%88.4% 88.8% 86.4% 82.0% 77.1% 73.5% 73.7% 73.1%

3.2% 6.1% 3.6% 1.9% 2.6% 2.0% 2.3% 2.4%9.4% 7.8% 7.4% 12.6% 16.6% 21.5% 21.1% 22.3%

Export by Products

Garment Rice Rubber Others (Electronic components, bicycles, etc.)

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Source: Ministry of Economy and Finance, 2016

Priorities: Export market diversification: from export to the US to

export to EU, Japan,...

15

3.2% 5.4% 3.6% 2.6% 3.0% 2.9% 3.0% 3.2%7.8% 4.5% 6.2% 7.2% 9.3% 11.7% 11.1% 10.3%

25.6% 24.6% 24.5% 28.2%21.5% 21.5% 21.7% 22.4%

23.8%25.0%

30.0% 32.1%33.4%

34.1% 37.9% 38.8%

66.5% 65.2%64.5% 60.8%

66.1% 66.1% 64.3% 61.8% 52.5% 52.3% 42.6% 36.7% 31.4% 26.7% 23.9% 20.9%

0.8% 1.1%1.1% 1.1% 1.1% 1.1% 1.0% 0.9%

2.6%2.4%

3.1%3.5% 4.8% 5.7% 6.8%

8.2%

4.0% 3.6% 6.3% 7.4% 8.3% 8.4% 10.1% 11.8% 13.2% 15.7% 18.1% 20.5% 21.1% 21.8% 20.2% 21.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of Export Value by Countries

ASEAN EU USA JAPAN Others

Priority 4: Upgrading Agriculture and Agro-Industry

The Industrial Development Plan 2014-2025 has specified to the need for upgrading agricultural sector and agro-industry development, while transforming into industrial age. All most one third of the GDP is contributed by the agriculture sector. Thus, it is crucial to prioritize agriculture sector and industry sector altogether through.

Exploring possibilities of establishing agro-processing zones such as furniture manufacturing, rubber processing, seafood processing, food processing for domestic use and export through public-private partnership.

Creating a development and promotion fund for export led product development using agro-processing technology.

Developing a coordination mechanism for processed agricultural product exports by way of addressing logistic issues, abolishing informal fees and improving trade.

Conducting a study to identify priority products with potentials to be processed for export and prepare a comprehensive action plan based on value chain in order to enable the Royal Government to provide concrete support to these sectors.

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Challenges 1: Low Skills and Skills MismatchCambodia’s past growth strategy has depended on labor-intensive industries to lead the economy.

According to the Asian Development Bank (ADB) and International Labor Organization (ILO) (ADB & ILO, 2015), 98% of children now enroll in primary school. But the percentage of children completing high school is very low at about 30% of the age group, and this constrains economic transformation.

The low secondary and higher school enrollment and quality has led to a mismatch between the skills young workers have and those that employers seek. ILO (2013) has also noted the weaknesses of Cambodia’s skills development system.

Attaining sustainable growth will require further economic diversification and intensification of existing activities that will necessarily rely on an expansion of the current skills supply (ADB & ILO, 2015).

Cambodia would need to boost labour productivity to compensate for rapidly rising real wages, including improving the quality of basic education, promoting vocational and technical skills, and reducing energy costs (World Bank, 2017).

Challenges 2: ODA Trends in Cambodia

Source: Council for Development of Cambodia, 2016

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Challenges 3: Weak Infrastructure

Inadequate infrastructure to support the next stage of development. ◦ The major national road networks are congested, leading to transportation delay and even adding more

pressure on the existing road structure.

◦ The need for better supporting infrastructure and a highly effective logistic system is accentuated with the drive for industrial development and the expansion of export, in particular in targeted industrial areas and export gateways.

◦ Other important issue related to physical infrastructure such as clean water supply and sewage system must be reconsidered in a new dimension.

Key factors constraint infrastructure development◦ a lack of leadership, coordination and effective decision-making especially on all important issues especially

related to the inadequate supply of electricity, infrastructure and logistics, human resource and skills as well as other supporting infrastructures.

◦ Inadequate preparation of the necessary industrial infrastructure, especially as related to insufficient coordination in physical infrastructure investment such as supply of electricity, clean water, telecommunication network, sewage and public service provision.

◦ Financial market development remains limited and that hinders the financing of industrial projects and lack of financing mechanism for public and private sector projects; and

Challenges 4: Climate Change and DisasterCambodia is prone to flood, fires, droughts, storms, pest outbreak, epidemic and river bank collapse;

20,50 people died from disaster between 1996 and 2013;

Major flooding events affecting a significant part of the population occur every five years or so (in 1961, 1966, 1978, 1984, 1991, 1996, 2000, 2001 and 2002).

Major flood in 2000 was reported that an estimated 750,618 families representing 3,448,624 people, including 85,000 families or 387,000 people, were temporarily evacuated from their homes and villages. Three hundred and forty seven (347) people, 80% of whom were children, were killed, and total physical damage was estimated at US$150 million.

2001 floods caused the death of 62 people (70% children) and an estimated US$20 million damage, and in 2002, 29 people (40% children) were killed and damage estimates were US$14 million.

The damage and loss caused by Ketsana (2009) in the infrastructure sector (US$28.7 million) was concentrated in the transport subsector (US$25.5 million).

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Opportunities for Development Cooperation – East and North East Asia (China, Japan, Republic of Korea and the Russian Federation) – In Supporting the Implementation of IPoA and 2030 Agenda (1)

0

50

100

150

200

250

300

350

400

450

500

2007 2008 2009 2010 2011 2012 2013 2014 2015est

Development Partner Funding

China Japan R. Korea

Source: Council for Development of Cambodia, 2016

Opportunities for Development Cooperation – East and North East Asia (China, Japan, Republic of Korea and the Russian Federation) – In Supporting the Implementation of IPoA and 2030 Agenda

Japan

◦ Diversification: SEZs; Economic Corridor along National Roads 5 and 1 (FDIs)

◦ Quality infrastructure (ODA)

◦ Capacity Building (ODA)

China and infrastructure development bank

◦ Highways and bridges

◦ Belt and Road Initiatives

Republic of Korea

◦ Agriculture and Agro-industry and Industry (FDIs)

◦ Country Partnership Strategy-CPS

◦ Infrastructure

◦ Security Market

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Opportunities for Regional Cooperation and Economic-Integration (2)

The Way Forward (1)Cambodia has made a huge improvement over the last two decades in terms of economic growth and poverty reduction. Graduating from LDCs status come close, but the country needs to consider the after-graduation issues. The growth strategy focus on building human resources and skills, development, diversifying the economy, building infrastructure to support growth and to upgrade agriculture and agro-industry. A number of challenges have been faced by Cambodia, including shrinking ODA, poor infrastructure and poor infrastructure. However the government realizes the partnership for, RCG has developed the Cooperation and Partnerships Strategy 2014-2018. Regional Cooperation and Economic Integration, especially ASEAN has provided opportunity for Cambodia to develop after graduating from LDC status.

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The Way Forward (2)

There is strong evidence that the opportunity cost of investing in education is very high for the young population. TVET as well as on-the-job training are very crucial and critical to retain and sustain the human capital development in the economy.

There is immediate need to diversify the industry structure and the exports market to create the links for global production value-chain. Given the structural changes in the economy, there are growing skills mismatches in the labour market.

Over the medium term Cambodia's resource envelope is limited as only modest increases in public resources can be expected through growth in the tax base and efficiency improvements since domestic resource mobilization through domestic borrowing seems also not feasible. Cambodia needs to focus on attracting more FDI from transnational corporations from different countries.

The Way Forward (3)

Quality Infrastructure to support (inclusive) economic growth. Integrating Climate Change/Disaster Risk Information into Infrastructure Development Program Budget.

Increase capital expenditure; currently, the recurrent expenditure is high.

Enhance it by maintaining macroeconomic stability, the rule of law, regulatory framework, and logistics and labour relations, particular focusing on both soft and hard infrastructures and trading facilitation.

Building relationship tied with Japan, China and South Korea for filling financing gaps through FDIs, diversification or export products and markets, infrastructure and capacity building.

Regional Cooperation and Economic Integration, i.e with ASEAN, to facilitate better transport, energy and ICT connectivity which in turn will increase access to services such as education, health, and housing as well as electricity and markets for marginalized populations.

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Thank You!