Cambodia Economic Directions: Today's Choices and Future Growth

Cambodia Economic Forum
Phnom Penh, February 16, 2011

Opening Remarks by
Qimiao Fan
Country Manager for Cambodia, the World Bank

Samdech Prime Minister Hun Sen Excellency,

It is a great pleasure for me to provide some opening remarks on behalf of the World Bank Group at the fourth Cambodia Economic Forum.  We are very much looking forward to the keynote address of Samdech Prime Minister Hun Sen. We value highly the Supreme National Economic Council’s role in organizing and chairing this event, and in particular the excellent leadership of H.E. Deputy Prime Minister Keat Chhon and H.E. Dr Moniroth.  We are also delighted of the productive partnership with our colleagues from the Asian Development Bank and the United Nations to support the Supreme National Economic Council.

The Cambodia Economic Forum is a very valuable and important forum as it allows the Government and its partners to engage in substantive dialogue on critical economic issues.  When we met two years ago, Cambodia was, literally, in the eye of a perfect storm – the global financial crisis.  You will remember that Samdech Prime Minister outlined the Royal Government’s policy package in response to this most uncertain environment.  I think we will all agree, the effective implementation of that policy package has served Cambodia well.  As a result, today, Cambodia is recovering well, together with most of Asia and ahead of many others in the world.

Also two years ago, based on our analysis of Cambodia’s growth potential, my remarks focused on the need to seize the opportunity created by the global crisis to position Cambodia for sustainable long-term growth.  Today, I want to outline what economic history tells us about where Cambodia could be in 20 years from now.  This is of course not an easy exercise: who would have said 20 years ago, just 8 months before the signing of the Paris Agreement, that by now Cambodia would have joined the WTO, would have almost tripled income per capita, and would have almost halved poverty?  I will not try to do a forecast, but rather build on what we know of a dozen of countries that have sustained rapid growth for a period of two decades, many of them in East Asia.

Let me ask you all to close your eyes for a moment and imagine yourselves in 2030.  Cambodia has continued to do well in terms of economic growth and is a middle income country. Achieving its potential of 7 percent growth per annum over the past 20 years, its GDP per capita is now over $2,000 (in 2011 terms). Productivity gains in agriculture have been significant, initially driven by the implementation of the Royal Government’s rice policy, and then increasingly driven by exports of processed products to Asia and import substitution of fruits and vegetables for the tourism market in Cambodia.  But agriculture now only accounts for 15 percent of GDP and less than half of the labor force.  In fact, more than half of the population lives in the cities.  Industry has been a key source of job creation and increasingly services are adding value.  A few very large special economic zones have become clusters of new activities.  This change owes much to the fact that, after 30 years of investment in primary and secondary education, Cambodia is finally closing the gap at the university level. This is also because the infrastructure bottlenecks of the post-conflict period have been addressed – not only through physical investment, but also through the right policy choices.

And now please open your eyes and ask yourselves: what could be some other elements of this future that you have just imagined?  It is most likely that a number of price shocks and other crises would have hit the country over the years, and only a stronger system of social protection targeted at the poorest and most vulnerable would have enabled the country to maintain its cohesion and productivity capacity.  More broadly, it is likely that Cambodia would have sustained development only by paying attention to equity – again a lesson learned from other countries that have developed rapidly.  If that’s the case, we can be hopeful that poverty in Cambodia will then have a much different face from today – with much needed progress in nutrition and maternal mortality.  Also, it is almost certain that those achievements would not have happened without institutional reforms – including with the building of a modern civil service.  All of this, of course, would have been possible only if the state has developed a capacity to mobilize domestic revenues and curb corruption.

Will this happen?  I am very much looking forward to joining the discussions led by SNEC on “thinking beyond the crisis” and “the direction of Cambodia’s future industrial policy”.  I believe indeed that the Royal Government has an opportunity to shape this future and to make this future a reality.  Let me offer three brief, yet in my view, critical points.

First, all along the way of the path that I have just outlined, Cambodia would have followed its comparative advantage to diversify.  Our Chief Economist Dr. Justin Lin discussed this issue with you, Samdech Prime Minister, a few months ago here in Phnom Penh.  This is one of the best-kept secrets of countries that have been successful in climbing the ladder from agriculture to agri-businesses, from assembly manufacturing to higher tech manufacturing, and from simple labor services to IT and other sophisticated services. The opposite – jumping too far ahead – has been the recipe for failure. What does that tell us for Cambodia today?  Firstly, Cambodia has abundant land, some of it very productive for agriculture, some of it ready for tourism development, some of it with mining potentials, some of it with indispensable biodiversity, some of it for housing, urbanization and infrastructure.  Good land planning and fair and transparent implementation of property rights is critical if Cambodia is to benefit from this comparative advantage. In addition, as the economic trajectory leads to rapid urbanization, tensions will be avoided only if property rights and urban services are planned well ahead.  My second comment related to Cambodia’s comparative advantage is the issue of skills.  Because of its history and notwithstanding major achievements over the past 20 years, Cambodia still lags in terms of skills – both soft skills like attitude to work and technical skills.  This requires attention today so that Cambodia can climb the ladder of comparative advantages over the next 20 years.  I am very much looking forward to the discussion on skills later today.  You will find our report on “providing skills for equity and growth” on the tables.

Second, the Rectangular Strategy has rightly emphasized the role of the private sector in driving growth, diversification, and job creation.  The role of the government is very much to work in partnership with the private sector.  Cambodia has many achievements to build on in this field: the Government Private Sector Forum is well known for being able to troubleshoot many issues arising for the private sector in Cambodia, and for serving as a channel for consultations on new regulations and laws; and more recently, the Royal Government’s policy for the promotion of paddy production and rice exports highlights how much government and private sector will have to work hand in hand to realize Samdech Prime Minister’s vision of the “white gold”.  But more is needed to identify sectors where the private sector is already growing fast and where facilitation by the Royal Government would bring such growth to yet higher levels.  The Special Economic Zones, which we will discuss tomorrow, offer the promise of a framework to pilot new reforms and quickly address private firms’ problems: they have not yet achieved their potential, but they could be fertile grounds to create jobs and new clusters of industries and services.

My last and related point is the issue of developing government’s capacity as a facilitating state.  Much has been said and much is being done on this issue.  Today, I just like to stress two priorities.  First, all countries that have followed this path of comparative advantage through a partnership with the private sector have mobilized significant domestic revenues to invest in their future.  While the 2010 revenue collection outturn is very encouraging, more is needed for instance to implement the property tax, close unnecessary tax loopholes, and tighten tax administration.  Second, all these countries have developed capacity to engage in strategic dialog with the private sector, formulate policies, and implement them.  This requires an integrated plan for public administrative reform, which tackles not just incentives, but also merit-based recruitment, performance management and training - to create a better paid and well managed civil service that is focused on delivering services.

Samdech Prime Minister, Excellencies, Ladies and Gentlemen; thank you for giving me this opportunity to share these thoughts with you.  Industrial policy, investment in human capital, special economic zones are not the silver bullets for growth and poverty reduction, but they do offer important avenues to unleash growth, create jobs, improve livelihoods and reduce poverty for the Cambodian people.  I look forward to a day and a half of stimulating debate and wish you all a very productive forum!

Thank you very much.