While advanced economies slowly recover from the financial crisis, Cambodia’s growth has been moving at a much faster pace. In an exclusive interview, International Monetary Fund Managing Director Christine Lagarde told the Post’s May Kunmakara there was still work to be done to reduce the risk of external shock and promote inclusive growth.
What is the outlook for Cambodia’s economy and how might the challenges be overcome?
We believe that Cambodia’s going to grow at a fast pace – seven per cent per year is a solid figure. We also believe that the journey towards de-dollarisation will take time but is the way to go. We believe that Cambodia will be an attractive destination for foreign direct investment.
Our recommendation is two-fold: one, improve productivity by investing in health and education and good governance. The second recommendation is make sure the financial market is stable, solid and well supervised so that it does not overheat, and does not create any type of credit bubble that could be a hindrance on the development.
So it’s a fine and subtle balance between proper, solid, yet flexible enough regulation, strong supervision and a financial sector that finances the economy.
What is the IMF’s advice for low-income countries like Cambodia who rely largely on export-led growth?
First of all, low-income countries have faired a lot better during the financial crisis that started in 2008 and have been quite strong as well in the latest development. Their growth is probably going to be in the range of five and a half per cent. Maybe a bit more actually. Cambodia is forecast to be, at seven per cent next year, which is a very enviable growth rate.
Our advice is certainly to strengthen the buffers in order for those countries that have gone strongly to be able to resist potential external shocks. The exports of Cambodia are 80 per cent driven by the growth of the US and Europe, are 80 per cent in the garment industry so effort to diversify the base in term of the industry and in terms of destination countries will certainly hedge the potential risk that Cambodia could face. The solid and stable macro economic framework and the financial environment are also conducive to stability for the country.
What can low-income countries do to promote more inclusive growth?
We believe that inclusive growth makes growth more sustainable. We have seen two phenomena lately; one is the financial crisis of 2008 which has probably increased inequality, and the significant rise in Asia has also increased inequality. So you are right to mention the objective of more inclusive growth in order to make sure that the growth is sustainable and we do advocate inclusive growth.
What would you advise the ASEAN member countries to do in order to reach their stated goal of the ASEAN Economic Community by 2015?
It’s a very ambitious and potentially rewarding project. Clearly the opening of markets and the lowering of trade and non-trade barriers has had very positive effects on many economies around the world. It has certainly helped the lifting out of poverty of many people.
To be better prepared for such ambitious economic integration each member to the integration has to strengthen its fundamentals. For Cambodia it is going to be a question of continuing to invest in its productivity, making sure that enough public spending goes to education, eliminating bottlenecks to infrastructure and mobilising revenues going forward in order to strengthen the economy.
What are your views on the world economy in light of the challenges faced by advanced economies?
Well, we see the global economy as going through a slow recovery process with growth forecast at about at 2.9 this year, probably about 3.5 next year. So, improving and strengthening in 2014 with a changed dynamic of the growth factors with advanced economies picking up a bit of speed and the emerging economy slowing down compared with the driving force that they were up until about six months ago.
In the meantime, because of the hint of tapering and the fear that investors have had, that led them to move the capital out of the emerging market economies, or some of them. Countries like Russia, India, Brazil, to a lesser extent China, South Africa have slowed down, that’s the changing dynamics.
This interview has been edited for length and clarity.