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Growth potential hangs on diversity

Taica Factory in the Phnom Penh
A workers checks manufactured shoe parts at Taica Factory in the Phnom Penh Special Economic Zone earlier this year. Hong Menea

Growth potential hangs on diversity

As Cambodia becomes increasingly integrated into the global market, the Kingdom needs to accelerate its efforts to diversify production or the local economy risks becoming stuck in a low-wage trap, the Asia Development Bank (ADB) warned yesterday.

The economy’s four pillars of growth – rice, garments, tourism and construction – have all contributed to high levels of GDP over the past two decades, but only very basic products are being made within these industries, ADB assistant chief economist, Cynthia Young Park said yesterday.

“Although they [Cambodia’s four pillars] will remain very important for the country’s medium growth prospects, this reliance on a very limited number of growth pillars presents some challenges and risks to the economy,” she said.

According to a new report from the ADB, Cambodia: Diversifying Beyond Garments and Tourism, low quality of education, poor infrastructure, weak management within the public sector and a lack of tax revenues all hamper the Kingdom’s ability to move away from simple levels of production. The lack of product diversity, the ADB says, leaves Cambodia vulnerable economic slowdowns in key export nations.

“The economy has relied more on the real low-skilled labour intensive sectors,” Park said.

“Probably, the window of opportunity is narrowing rapidly,” she added, referring to the potential to mix up Cambodia’s economic output.

Value-added products like machinery, chemicals, furniture and bicycles are among those which the Kingdom’s manufacturing should aim to produce, the ADB says. But to attract investment in these areas, the development bank has called for policies to improve health care and education, enhance roadways, expand electricity distribution and improve public administration.

Speaking at a presentation of the ADB findings in Phnom Penh yesterday, Vongsey Vissoth, secretary of state at the Ministry of Economy and Finance recalled Cambodia’s robust growth over the past two decades and said that many of the ADB findings support the government’s policy direction.

But speedy policy implementation is needed in order for the economy to sustain high-levels of growth in the future, Vissoth said.

“Cambodia has seen rapid growth of its mainstay export base, accompanied by strengthening diversification as evidenced through the emergence of some new export sectors – assembly of light manufacturing components and car parts,” he said.

“But Cambodia is not diversifying as rapidly as needed in order to support the Royal Government of Cambodia in achieving its long-term social and economic development goals,” Vissoth added.

Competition from neighbouring countries will also play a role in how quickly Cambodia can diversify its economy, Julian Clarke, World Bank senior economist said.

According to Clarke, Vietnam, who is currently negotiating a free trade agreement with the European Union, looks set to benefit from favourable tax treatment on some of its manufacturing exports and is likely to draw potential business away from Cambodia.

“I think it might undermine a lot of the competitive advantage Cambodia currently has in terms of the Everything but Arms intuitive,” he said. “I think there could be some delay, or it may undermine this trajectory that Cambodia is on toward the diversification; into the light manufacturing; into the more sophisticated manufacturing,” he said.

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