Forging a more inclusive and resilient post-pandemic recovery in Cambodia

The Cambodia Poverty Assessment 2022 shows that Cambodia made remarkable progress reducing poverty over the past decade, but that recent gains in reducing poverty were threatened by the COVID-19 pandemic.

Progress

Between 2009 and 2019, Cambodia grew rapidly and reduced poverty. Exports and foreign investment inflows into manufacturing and services fostered growth and created nonfarm jobs, many of which were more productive and raised incomes. As most of these jobs were labor-intensive, they absorbed many low-income agricultural workers. This reallocation of workers to more productive sectors of the economy and the sizeable increase of non-farm earnings bolstered household income and enhanced welfare. Cambodia’s national poverty rate plunged from 33.8 percent to 17.8 percent between 2009 and 2019/20, a reflection of economic growth that averaged 7 percent over the period.

Thanks to rising earnings and remittances, improved service delivery, and pro-poor social assistance, standards of living increased faster in rural areas than in towns and cities, narrowing the urban-rural income gap.  

COVID-19 setbacks

However, the pandemic dealt a setback to Cambodia’s growth and poverty reduction progress. In 2020, Cambodia’s GDP shrank 3.1 percent, the first economic contraction in 25 years. It was among the most pronounced economic declines in the East Asia region. Labor markets weakened considerably as the sectors driving growth and employment were negatively affected. Household incomes declined due to lost jobs, reduced hours and wages. About two years of poverty reduction were reversed, increasing the poverty rate 2.8 percentage points and pushing around 460,000 individuals into poverty.

A substantial social-assistance package targeted at the poorest households lessened the poverty impact of the pandemic. While transfers were substantial, they could not make up for lost labor income and the full impact of the pandemic on low-income households. Further, some Cambodian households were vulnerable to the slower recovery of the employment-intensive services sector during 2021–2022 and high inflation due to rising food and fuel prices in late 2022.

Policies to strengthen growth and accelerate poverty reduction

Five policy actions could strengthen Cambodia’s economic growth and accelerate poverty reduction in the aftermath of the pandemic: 

1. Provide cash transfers to deliver emergency relief, recovery, and resilience support. To protect poor and vulnerable families from falling (deeper) into deprivation will require providing cash support during and after a crisis, increasing the transfer amount a family receives, and expanding social assistance coverage to newly poor and near-poor households. Using cash transfers as part of a recovery strategy will help poor families to build savings and assets, reducing vulnerability and strengthening resilience.
2. Strengthen Cambodia’s post-pandemic social protection system to be better prepared to respond to future crises. Policies include increasing spending on social protection to above the pre-pandemic level of 0.1% of GDP, instituting adequate social assistance benchmarked to the poverty line, introducing shock-responsive elements to social assistance programs, and developing a social registry built on the Identification of Poor Households (IDPoor) program.   
3. Improve human capital through health and education investments. Despite improvements, human capital indicators lag other lower middle-income countries and remain important challenges in rural Cambodia. Some human capital indicators, including school participation and learning, further suffered from the negative pandemic impacts. Cambodia’s human capital indicators would benefit from improvements in the number of years a child spends at school, learning outcomes, and child nutrition. To ensure Cambodians lead healthy and productive lives will require increasing spending on health and education in rural areas and improving the quality of health and education service delivery.
4. Diversify Cambodia’s growth model. The sharp economic impact of the pandemic lies in Cambodia’s lack of economic diversification. This is rooted in: low productivity, partly reflecting low human capital; low competitiveness and limited international integration; and low domestic investment. Three transformations could strengthen Cambodia’s economic recovery: (i) improving firm and worker capabilities; (ii) diversifying exports; and (iii) harnessing domestic investment to finance the next phase of growth. Diversifying the economy further and achieving higher productivity growth would increase Cambodia’s long-term growth and poverty reduction potential.
5. Strengthen the redistributive effect of fiscal policy and finance poverty reduction strategies sustainably. Before the pandemic, fiscal redistribution was relatively weak. While the 2019 tax system was progressive, public transfers to the poor were too small to offset the impact of indirect taxation. Cambodia can strengthen redistribution and poverty alleviation while financing poverty reduction strategies sustainably. This can be achieved by integrating an equity lens in the development and implementation of the upcoming Revenue Mobilization Strategy, broadening the tax base, and providing more targeted pro-poor spending.