Seeing the financial crisis: What might contraction look like in Cambodia?

Declining revenue of tuk-tuk drivers in Cambodia shows even the informal sector isn't insulated.

Growth forecasts in Cambodia are generating a fair bit of confusion. Many simply question whether it is possible for GDP growth to be lower in 2009 than in the past 15 years.

The World Bank today launches its projection of a 1 percent contraction of the Cambodian economy. This is based on an analysis of available statistics and feedback from a range of economic actors. Yet, to most of my Cambodian friends, it remains hard to conceive.

It is true that "seeing" such a contraction will be difficult. Basically, what it means is that economic activity in 2009 will be pretty much the same as in 2008. So the fact that we continue to have traffic jams in Phnom Penh, see tourists at the Royal Palace, and hear construction machines in many residential areas is consistent with such a projection. What will change, though, is that incomes will not increase this year as fast as past years and it will also become more difficult for the 250,000 young people leaving school each year to find their first job. What also will be different is that with no growth in aggregate, there will be a proportion of those with a livelihood at the end of the year worse than at the beginning.

The first sign of this downturn is probably in local newspapers: we've talk more about economics this year than last. More significant signs are those factories that either close definitely ( some say almost one in five garment workers) or temporarily (a one percent contraction of the economy more or less means that every production activity stops for an additional 3 days this year). I am told that there are also visible signs in Siem Reap, with less-than-full hotels. We are likely to see migrations as well as people move as a reaction to changing (or missing) opportunities: but it is not easy to "see" migration.

The other reason of incredulity is that most people in Cambodia live off agriculture or informal jobs. It is true, in my view, that these sectors often do not face the direct consequences of the global economic crisis: the crisis affects Cambodia's economy because it leads to fewer consumers to buy Cambodian shirts; less money to go on a trip to Angkor Wat; and fewer investors to develop Cambodia's formal sector. The rural and informal sectors have traditionally been the shock absorber of a rather resilient economy. And still, we have data showing a sharp decline in the revenue of tuk-tuk drivers; we know that the livelihood of many rural families depended on remittances from a woman in the family that was working in a garment factory or a man working on a construction site. So, even the informal sector is not entirely insulated from the global crisis.

To me, the main question is how long the slowdown will last. Comparing this question with the development of my children, I would probably not notice immediately if one of them would stop growing for a little while. And it might not be an issue anyway, as he or she could later catch up. But sustained slow growth is much more of a problem. Our World Bank analysis remains positive on the medium-term prospects of growth for Cambodia.

Will the resilience of Cambodia's economy avoid a contraction of the economy this year? Has the country the capacity to rebound as early as next year? Let me know what you think in the comments below.

Image credit: zieak at Flickr under a Creative Commons license.