Regions and Countries

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p. 8 of 11 BACK | NEXT Executive Summary I. Recent Economic Developments II. Short and Medium-Term Economic Prospects and Policy Issues A. Growth and Investment B. Macroeconomic Management C. Risks and Uncertainties Appendix

Country Economic Review - Cambodia : II. Short and Medium-Term Economic Prospects and Policy Issues

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A. Growth and Investment

54. Achieving and sustaining a higher rate of economic growth is essential if Cambodia is to make significant progress in reducing pervasive poverty. The rapidly growing labor force must be absorbed in the context of rising labor productivity and real wages. The Government has set a long-term, real GDP growth target of 6.0 to 7.0 percent. If this target is achieved, implying real GDP per capita growth at or above 4.0 percent, then the incidence of poverty should begin to fall. If a greater portion of that growth comes from increased agricultural productivity and the expansion of service provision, particularly by small- and medium-size enterprises, then poverty reduction should proceed more rapidly.

55. The Government’s development goal is to move the country out of the ranks of least developed countries by 2020. The United Nation’s Human Development Report 2000, using 1998 statistics , ranks Cambodia near the bottom of the group of countries considered to have achieved medium human development (MHD)²⁰ Comparing Cambodia’s performance with that of the average MHD country is instructive. The average MHD citizen can expect to live about 16.0 years longer than the average Cambodian’s 53.5 years, to have nearly three times the Cambodian’s per capita income of $1,257 measured at purchasing power parity, and to be literate, as are about 77.0 percent of the citizens of MHD countries, compared with 37.0 percent of Cambodians²¹

56. The typical MHD country’s 1998 GDP is distributed by value added as about 15.0 percent in agriculture (Cambodia, 43.0 percent), 35.0 percent in industry (Cambodia, 20.0 percent), and 50.0 percent in services (Cambodia, 37.0 percent). To achieve this structural transformation, Cambodia will need to boost its gross domestic investment rate from about 15.0 percent of GDP closer to the MHD average of 25.0 percent, and its gross national savings rate from about 11.0 percent to the MHD average of about 25.0 percent. Boosting investment rates, currently low and overly dependent on foreign savings, is critical to achieving the Government’s goal of sustained real economic growth of 7.0 percent per annum.

57. In the short term, Cambodia can expect to achieve about 4.5 percent growth of real GDP in 2000, despite a flood-related contraction in agriculture (Table 13). This projection is based on rapid export growth, primarily in the garment sector, and the continued expansion of the tourist industry. These two factors should combine with an agricultural recovery in 2001 to return growth to the 5.0 percent range. Unfavorable factors that might limit growth in the short run are a slowing US economy, which could curb the growth of tourism and garment exports, and a continuation of high world oil prices. A decline in investment activity in 2000, in part because of the inhibiting effects of the flood on economic activity, should be followed by a modest rebound in investment in 2001 as private investors continue to be attracted to the garment and tourism sectors, while foreign aid agencies boost investment to accommodate emergency relief.

58. In the long term, agricultural productivity must rise above subsistence levels and the proportion of the population engaged primarily in agriculture must fall. The most important medium-term constraints to reaching that goal appear to be (i) the inability to mitigate the damage caused by flooding and drought, (ii) inadequate natural resource management (particularly forest and fisheries), and (iii) insecure land rights.

59. First, the annual uncertainty about weather conditions imposes huge risks on agricultural activities, reducing returns to private investment, particularly in annual crop production. Second, mismanagement of the nation’s forest and fisheries resources in the medium-term could seriously reduce long-term potential in these two sectors, which have a combined contribution to value added of about 15.0 percent of GDP. Moreover, these activities act as supplemental sources of income as well as sources of fuel and protein for the rural population. Finally, lack of clear land title erodes incentives for farmers to invest in land improvements as well as limits their ability to borrow for investment purposes. Thus, in the medium term, without sustained efforts to relieve these constraints, significant improvements in agricultural productivity are unlikely to be obtained.

60. In industry, past performance has been overly reliant on expansion of the garment sector in conjunction with preferential access to US markets. In the short term, this expansion is likely to continue. However, world trade in textiles is to be liberalized by 2005, so the long-term prospects for the Cambodian textile industry are less certain. Moreover, as countries such as the People’s Republic of China and Viet Nam move to regularize trade relations with the US and join the World Trade Organization, Cambodia’s medium-term advantages are likely to be eroded. Thus, diversification into other industries based on an overall strategy of liberalizing trade to achieve export-led growth would seem to be important. The most immediate policy implications for Cambodia are to maintain macroeconomic stability while working to improve legal and regulatory conditions, and enhance physical, human, and financial infrastructure.

61. In services, performance should improve over the medium term, as the tourism industry continues to expand. If agricultural and industrial growth can be sustained, domestic demand for services should continue to improve. The service sector, currently accounting for 37.0 percent of GDP and 17.0 percent of employment, has tremendous potential for growth in value added and employment, particularly when compared with the experience of average growth rates of this sector in other countries, such as the 6.0 percent average growth rate achieved by Viet Nam during 1995-1999. The most immediate constraint to service sector expansion is probably the lack of financial services for the expansion of small- and medium-sized enterprises.

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