Exports and jobs for inclusive growth in Cambodia

Unpacking Cambodia's Economic Leap: Trade Liberalization and Labor Market Gains

Cambodia’s economic growth over three decades has boosted employment, wages, and overall prosperity, lifting many Cambodians out of poverty. Cambodia underwent structural transformation in the last decade involving worker migration from agriculture into industry and services. Cambodia’s agricultural workforce decreased from 58 percent in 2009 to 37 percent in 2019, with a corresponding rise in employment in manufacturing and services.

This transformation has been supported by Cambodia's commitment to trade liberalization as evidenced by various policy measures and agreements: the country joined the World Trade Organization (WTO) in 2004, has benefited from the Generalized System of Preferences (GSP), and has signed multiple bilateral and multilateral trade agreements. Improvements in cross-border trade procedures have streamlined export and import processes, making Cambodia one of the most open countries in the region for trade in manufacturing goods and services. These initiatives have not only expanded Cambodia's trade volume but supported its economic base although it remains narrow.

Some studies on export-driven growth have suggested that such strategies may lead to different results in key labor market outcomes, such as wages, hours worked, or female labor participation, depending on country specific characteristics. Our recent study, Dynamic Exports and Labor Markets for Inclusive Growth in Cambodia, combines two analytical models—the Gravity model and the “Bartik” model—to unpack the intricate relationships between trade agreements, trade flows, and labor market outcomes in Cambodia. This study builds on the findings of the recent Cambodia Poverty and Equity Assessment.
 

Methodology

The Gravity model, widely used in trade economics, helps explain how trade agreements influence trade flows, considering factors like economic size, geographic distance, different trade costs, and both bilateral and multilateral trade agreements.

The shift-share “Bartik” model, provides insights into how changes in trade exposure affect local labor markets.
 

Key Findings

The application of the Gravity model reveals that trade agreements, particularly those within ASEAN, are positively associated with increased trade flows. Cambodia's specific trade gains from these agreements are larger than the average benefits experienced by other countries, indicating that Cambodia has leveraged its trade agreements well, translating increased trade into tangible benefits for its economy.

Applying the Bartik model uncovered several important labor market insights:

Reduction in Informality: Increased trade exposure is linked to a small decrease in informal employment, which is typically unregulated and lacks social benefits. Informal jobs have traditionally dominated Cambodia's labor market. The decline in informality suggests that some Cambodians are moving into formal employment, which typically offers better wages and working conditions.

Increase in Hours Worked: Trade exposure correlates with an increase in average hours worked, particularly among female workers. This shift indicates not only more job opportunities but also points to potentially more stable and regular employment. For women, the increase in hours worked is particularly encouraging, reflecting better integration into the labor market.

Gender-Specific Gains: The positive effects of trade exposure are more pronounced for female workers. This could be attributed to the nature of Cambodia's export industries, such as apparel and textiles, which are traditionally more female-intensive. This is consistent with the advances in the gender wage gap experienced in Cambodia (figure 1).
 

Figure 1. The gender wage gap has decreased 10 percentage points since 2009.

Conclusions and Policy Implications

Cambodia's experience underscores the potential of trade liberalization to drive economic growth and improve labor market outcomes. Trade agreements have boosted Cambodia’s trade flows, and this increase translated into tangible benefits for the local labor market in terms of wages, working hours and female participation in the labor force. This highlights how trade policies can foster economic and social development.

By leveraging trade agreements and fostering industrial transformation, Cambodia has set a strong potential example that may be suitable for other developing countries. However, from a policy perspective,  it is important to note that the benefits of trade liberalization are not static. The benefits of trade exposure tend to dissipate over time, suggesting that continuous policy efforts are needed to sustain growth and labor market improvements. Further research is essential to understand the long-term effects and to fine-tune policies that foster inclusive and sustained economic development across all sectors.