Cambodia - Economy
Cambodia’s 13 million people had an average annual per capita income in 2004 of only $266 and over 30% of the population lives in absolute poverty. Informal estimates of annual per capita GDP in terms of purchasing power in the United States is equivalent to around $1,500. Malnutrition is widespread, particularly among children and women. More than 50% of the country’s population under 19 years old. The economy is heavily dollarized; the dollar and riel can be used interchangeably.
Prime Minister Hun Sen made efforts to bridge the gap between the political and private sector by cultivating mutually beneficial relationships with the country's most prominent business tycoons. These business leaders contribute money to the ruling Cambodian Peoples Party (CPP) and Hun Sen can call on them to fund charities and public works projects and to attract foreign investment, achievements for which the CPP can claim credit. In return, the business tycoons enjoy the added credibility and legitimacy of having the Prime Minister's support. These symbiotic relationships illustrate the networks of business tycoons, political figures, and government officials that have formed in Cambodia, which reinforce the culture of impunity and limit progress on reforms such as Hun Sen's self-declared "war on corruption."
Cambodia’s economic growth has been one of the fastest among Asia’s developing economies in recent years. It averaged 7.0 percent in the five years 2010-2015 driven by robust garments exports, real estate, and construction. Economic activity remained strong with growth rate at 7 percent in 2014, notwithstanding appreciation of the real effective exchange rate following U.S. dollar strengthening and growing competition from other low-cost garment producers. Inflation fell in 2014 and through 2015 owing to strong external disinflationary pressures from lower food and oil prices. Cambodia is well placed to take advantage of the transformation of regional trade patterns to expand and diversify its export base and further integrate into global supply chains.
The current account deficit (CAD) is estimated at around 12 percent of GDP in 2014, and is largely financed by FDI and official loans. Gross official reserves increased to US$4.7 billion by end-August 2015, nearly 4 months of prospective imports. The fiscal deficit narrowed in 2014 to 1.3 percent of GDP from 2.1 percent in 2013, supported by stronger revenues owing to improved enforcement in tax and customs administration as well as higher-than-planned grants.
Cambodia remains heavily reliant on foreign assistance -- about half of the central government budget depends on donor assistance, and as much as one tenth of gross national product. The RGC collects very limited legal revenues, as large sums are lost to smuggling, bribes and other illegal practices. Further losses are experienced once revenues enter the state financial system. Informants estimate annual diversions from government coffers ranging between $300 and $500 million.
Foreign direct investment dropped substantially with the political instability of 1997 and was only $104 million in 2000, the lowest since statistics began 1994. Foreign direct investment (FDI) increased 12-fold from 2004 to 2010 as sound macroeconomic policies, political stability, regional economic growth, and government openness toward investment attract growing numbers of investors.
Cambodia was once one of Southeast Asia’s most stable and prosperous countries, but its social, economic, and political institutions were essentially destroyed by the Khmer Rouge regime from 1975-79 and Vietnamese communist central planning that followed. The Cambodian government officially adopted market economics in 1989, but it was not until after the re-establishment of the constitutional monarchy in 1993 that the economy finally began to grow again.
Cambodia is one of the world’s poorest developing countries, but with a relatively fast growing market economy. From 2001-2010, the Cambodian economy expanded by, on average, 8% per year, with the garment sector and the tourism industry driving the growth, and inflation remaining relatively low. The onset of the global recession led to a 0.1% contraction in 2009, but growth resumed in 2010 at 5.95%.
The current situation of legal uncertainty has encouraged land grabbing by the elites in Cambodian society as well as encroachment on forestland by the landless. Forest and wildlife resources are being lost steadily through illegal harvesting at a range of scales. These trends are causing conflict between the communities that rely on land and resources for their livelihoods and the outsiders that are seizing them or using them illegally. In a nation where 85% of the population lives in rural areas, with 63% earning their living by subsistence agriculture, more land is needed to accommodate young families each year.
The garment industry has been Cambodia’s greatest success, growing from seven factories exporting $4 million in 1994 to over 200 factories in 2002. Manufacturing output is concentrated in the garment sector, and garments dominate Cambodia's exports, especially to the U.S. and the EU. Garments dominate Cambodia’s exports, accounting for over $1.12 billion in 2001, or 88.3%, of total exports. More than 70% of Cambodian garment exports went to the United States. In 2010, the garment sector grew 15%. Employment in the sector and garment exports were expected to reach pre-crisis levels in 2011. The daily wage in the garment and footwear industries was around $2.00 per day in 2004, or about $45 per month. There is no minimum wage for any other industry, and daily wages for field workers and laborers is typically $1.00 per day. The industry expanded rapidly from the mid-1990s until 2008, employing 350,000 workers and generating $3 billion in annual revenue at its peak.
The global economic slowdown caused a drop in demand, resulting in a more than 20% decline in garment exports and an estimated 60,000 unemployed workers from late 2008 through 2009. Garment exports, a key sector in Cambodia's economy, fell precipitously. According to figures from the Ministry of Commerce, in the first six months of 2009, total garment exports declined by 24.2% year-on-year with garment exports to the U.S. falling 31.5%. A total of 49 factories closed their doors in the first half of the year, while 20 new factories opened during this same time, according to the Ministry of Commerce. While US demand for garments had fallen, the decline in imports from Cambodia was disproportionately large compared to the falloff in total US garment imports, indicating that Cambodia's garment industry was losing market share to other regional competitors. The government responded by extending tax incentives to manufactures, but initially failed to address the real challenges to the competitiveness of Cambodia's garment industry.
Buyers were making decisions to source elsewhere due to problems which plague Cambodia's industry, such as poor infrastructure, low productivity, strained industrial relations, and corruption. For example, a deal that reportedly would have been worth more than US$100 million annually in orders from Japan, went to Bangladesh last year instead. Some "informal fees" encountered during the customs clearance process for a sample shipment factored heavily in the Japanese buyer's decision to source elsewhere.
Tourism levels, which increased to approximately two million arrivals in 2008 but were also hurt by the global downturn, rebounded to 2.15 million arrivals in 2010. Accounting for 16 percent of Cambodia's GDP in 2008, and employing roughly 300,000 workers, Cambodia's tourism industry helped fuel the prior decade of rapid economic growth. However, the global economic crisis, coupled with the political turmoil in Thailand, took a toll on the sector's once robust growth. Growth slowed to 5.5 percent in 2008, compared to the nearly 20 percent growth in 2007. According to the Ministry of Tourism's statistics, tourist arrivals to Cambodia declined by only 1.1 percent in the first half of the year, compared to the same period in 2008. However, this figure did not accurately reflect the significant impact that the change in the types of tourists visiting Cambodia was having on the sector.
The IMF estimated that tourists arriving by air had fallen by double digits in 2009. Long-haul tourists decreased, replaced by visitors who spent less time and less money during their visit. According to the Ministry of Tourism, South Korean visitors, who had been the largest group visiting Cambodia in 2008, fell an estimated 33% in the first six months of 2009, while tourist arrivals from Vietnam had increased by approximately 40% and arrivals from Laos had risen 141% during this same period. The increase in Vietnamese visiting Cambodia may in part be attributable to the December 2008 implementation of visa waivers between the two countries.
The country's foremost tourist destination Siem Reap had been hardest hit. According to the Minister of Tourism, the majority of Vietnamese tourists visit Phnom Penh, rather than Siem Reap. Many of these tourists visit Cambodia on inexpensive package tours, Ho Vandy explained. Revenues generated from the increase in Vietnamese visitors fall short of offsetting the loss of South Korean or other tourists who in general spent more time and money per visit.
Hotel occupancy rates in Siem Reap declined 30 to 40 percent in the first six months of 2009. Approximately 7 to 8 percent of Siem Reap's 120 hotels shut their doors temporarily during the low season from March to September, another 30 to 40 percent suffered from profit losses, and some have downsized employees by 50%, contributing to rising unemployment in the area. Roughly 2,000 workers in this sector lost their jobs or were temporarily suspended until after the low season, waiting for the sector to recover.
The service sector is heavily concentrated in trading activities and catering-related services. The real estate sector contracted by 15.8% and land prices declined 10%-15% in 2010. Both commercial bank credits and deposits grew between 20%-25% in 2010. Exploratory drilling for oil and natural gas began in 2005, and commercial production is expected to commence in late 2012, but it is not yet clear if commercial extraction is viable long-term or how large Cambodia's reserves are.
In spite of recent progress, the Cambodian economy continues to suffer from the legacy of decades of war and internal strife. Per capita income and education levels are lower than in most neighboring countries. Infrastructure remains inadequate, although road networks are improving rapidly. Most rural households depend on agriculture and its related subsectors. Corruption and lack of legal protections for investors continue to hamper economic opportunity and competitiveness. The economy also has a poor track record in creating jobs in the formal sector, and the challenge will only become more daunting in the future since 50% of the population is under 20 years of age and large numbers of job seekers will begin to enter the work force over the next 10 years.
As a result of the widespread social destruction and emigration during the Khmer Rouge period, overall literacy today is 68% and adult literacy is only about 35%. There are few well-educated or skilled workers available, and training and education are in high demand. Due to this large supply of labor, increasingly mechanized farming, and poorly developed rural industry, there are few rural job opportunities for the 200,000 young people who enter the labor force each year. Thus, urban migration is becoming a major factor in Cambodia’s few large cities.
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