Debating Cambodia's growth: A tsunami in 2009?


This page in:

The global slowdown is hurting Cambodia's tourism industry, with fewer visitors in late 2008 than in the same period of 2007. Image credit: flydime at Flickr under a Creative Commons license.
Cambodia was one of the few Asian countries saved from the December 2004 devastating tsunami. But, a few days ago, at the Cambodia Economic Forum, panelists suggested that the economic tsunami – or various synonyms – would not spare Cambodia.

It's been a couple of months since the World Bank prepared the "perfect storm" report on the recent economic developments in East Asia. Our view at the time was that the crisis would reveal some of Cambodia's economic vulnerabilities – i.e. its lack of export diversification and its extreme reliance on foreign investment for growth. I think that this is an important lesson from our recent analysis on growth in Cambodia (more on this later).

Our projections for 2009 at the time were just below 5 percent GDP growth. This is consistent with the projections of the Government, the IMF, the Asian Development Bank, and an International Labor Organization (ILO) report on the impact of the crisis released yesterday. The Economist Intelligence Unit has a more pessimistic projection of 1 percent.

So who is right? I have to say that the differences probably reflect the uncertainty of the environment and the lack of good statistics. Whether 1 or 5 percent, income per capita will grow between negative 1 percent and 3 percent in 2009, against 8 percent on average over 1998-2007. That's precious little for a country with some 250,000 young people entering the labor market each year.

To facilitate a debate, here are some recent observations, all pointing downward (You can also see my fellow blogger Jamie Seward's recent regional review):

  • Tourist arrivals have slowed down, in part due to the disruptions that also affected tourism in Thailand (the airport closure). The global slowdown (for instance in Korea, one of the main source countries of tourists in Cambodia) is hurting the industry with fewer tourists in the last quarter of 2008 than in the last quarter of 2007.
  • Exports of the garment industry (see my previous post) have already slowed down and orders are low at the moment, reflecting in large part the retail sales in the US (Cambodia's main export market). The industry has already had to lay off almost 10 percent of its workers, with less overtime – hence income – for those still employed.
  • New foreign direct investment is becoming rare in Cambodia as in other countries. It is visible for us in Phnom Penh that large scale (and foreign-financed) construction activities have slowed down (although, I have to say, that other signs – such as traffic jams – do not point toward too much of a slowdown).
  • These elements are largely driven by the external environment – demand for exports and supply of foreign capital. Unfortunately, here as well, the consensus is getting gloomier with a sense that economies will reach the bottom later than hoped (not before late 2009).
  • As noted by the ILO report (pdf), all these points have a significant impact on employment and incomes.
  • The recent IMF article IV (pdf) and our analysis on growth have stressed the fragility of the financial sector given its very recent rapid development.
  • On the brighter side, agriculture has been doing well in 2008. But even there, the sector is vulnerably to poor weather and the fall in the price of some commodities (e.g. cassava and rubber) will have a negative impact on farmers.

Join the Conversation

David Michael
February 23, 2009

I am not as pessimistic about Cambodia's growth prospects as some of these articles, but the end result will depend largely on how the current downturn is handled, especially credit for trade. But first, the garment sector of Cambodia still has significant potential to grow, in part because of Cambodia's low labour costs (the lowest in the world). This advantage has not been fully exploited, in part because of the high costs of doing business in Cambodia and, in particular, high costs of key inputs like electricity. Apparel imports from Cambodia still only account for 3% of US apparel imports. There is an enormous opportunity for Cambodia to capitalize on its labour cost advantage during a deepening global recession which must ultimately lead to growth in demand for low cost apparel products.

A key issue is improving capacity of Cambodian supply chains to improve quality, gain access to credit (is there not some scope for some form of limited guarantee facility?), penetrate new markets and exploit their labour cost advantage.... for both textiles and garments and food. Could go on about this.

Stéphane Guimbert
February 23, 2009

It is the nature of this crisis to have a wide range of viewpoints. I agree that Cambodia continues to have a number of comparative advantages and a good medium-term potential for growth (and that's what our recent analysis on growth suggests). However the key in your comment is that "the end result will depend largely on how the current downturn is handled". The global crisis is revealing some important vulnerabilities in Cambodia's economy. And Cambodia's capacity to weather the crisis will depend on the policies it adopts.

I'd be curious about the data supporting your claim that "Cambodia has the lowest labor cost in the world". I think that the attractiveness of a country's labor force is a mix of its cost, skills (including basic skills), and labor standards (our colleagues from UNDP Cambodia are finalizing an interesting report on competitiveness, which looks at some of this). Labor standards has proven particularly important in the area of garments.

That said, I would argue that there remains an element of pessimism, which is that Cambodia is very dependent on the global economy. Take garments: even if Cambodia can fix all the problems that you correctly highlight, if the world demand for garments is weak, then Cambodian exports will be weak. That is what will make the next couple of months difficult for the country.