The devastating impact of Covid-19 on Cambodia’s economy lies in the country’s growth generating process.
- Prior to the pandemic, Cambodia was a world leader in economic growth and poverty reduction. It sustained an average growth rate of 7.7 percent between 1995 and 2019, raising its per capita income from US$323 in 1995 to US$1,621 in 2019, and graduated to a lower-middle-income economy in 2015. The poverty rate fell from 47.8 percent in 2007 to 13.5 percent in 2014.
- Cambodia’s growth slowdown in 2020 due to the Covid-19 pandemic was among the most pronounced in the East Asia region. Growth fell by an estimated 10.1 percentage points from its pre-pandemic average growth rate.
- This dramatic slowdown in growth can be attributed to dependence on a narrow range of products, markets, and factor inputs. In recent years, five products have in recent years accounted for 80 percent of total exports; two markets have accounted for 69 percent of merchandise exports; and foreign capital accounted for 72 percent of total capital investments in 2018.
The diversification problem is rooted in low and declining productivity; low quality and weak export linkages; and high foreign direct investment (FDI) but low domestic investment.
- Cambodia’s inability to grow the product basket is explained by low labor productivity, or output per worker, which lags behind most countries globally when at Cambodia’s development level. Low labor productivity, at least in part, reflects low human capital. But the largest contributor is low and declining total factor productivity (TFP).
- Low competitiveness and limited integration within global value chains (GVCs) have led to concentrated markets and trade. Constraints to diversifying and upgrading Cambodia’s trade are quality of FDI, low firm and worker capability, costly trade-related regulatory barriers (particularly affecting agricultural products), insufficient trade-related infrastructure, and nascent use of regional trade agreements to support greater market access for exporters.
- The country’s low private savings rate, and as a result low domestic investment, has led to reliance on external financing sources. Rather than how many households save, how much households save and more important how households save appear to be key factors impeding greater domestic investment.
Three transformations can strengthen the recovery and help the country return to sustained economic growth.
- A focus on firms and their workers is key to unleashing productivity. Policy reform in target areas can help the country meet its potential, including: investing in human capital through health and education; supporting more efficient resource allocation through improved market institutions and PIM; easing the regulatory burden for firms thereby reducing informality and its negative impact; and improving the performance of key services inputs to strengthen domestic linkages.
- Diversification of exports can continue driving growth during the recovery from COVID-19. A cross-cutting and medium-term policy agenda to diversify Cambodia’s trade is structured on upgrading in manufacturing GVCs, creating value addition in agriculture, and increasing competitiveness to export modern services.
- Harnessing domestic investment can help finance the next phase of growth. Policy areas include promoting FDI into productive and export sectors; promoting higher domestic savings rates; improving financial inclusion through greater access to savings institutions; supporting digital access through digital technologies; lowering the costs of savings accounts; and supporting financial sector stability and development more broadly.
Urgent action is needed to support Cambodia’s economic recovery from Covid-19 in a way that addresses the diversification problem to build back even stronger.
- An ambitious reform agenda is needed—one that focuses on improving capabilities, strengthening regulations, and investing in infrastructure.
The CEM findings are based on in-depth analysis and extensive consultation with a broad range of stakeholders.
- The CEM is a World Bank report prepared in consultation with stakeholders. It revisits Cambodia’s growth model, with the objective to identify constraints and opportunities for sustained economic growth and proposing policy options to address them.