Productivity, Diversification, Domestic Investment Are Key to Cambodia’s Economic Recovery

Phnom Penh — The blow to Cambodia’s economy from the COVID-19 pandemic was among the most pronounced in East Asia, but the country can regain sustained economic growth by increasing productivity among firms and workers, diversifying exports, and taking steps to boost domestic investment, the World Bank says in its Cambodia Economic Memorandum.

Cambodia’s growth rate, which averaged a robust 7.7 percent between 1995 and 2019, plunged an estimated 10.1 percentage points to contract by 3.1 percent in 2020 before resuming modest growth of 2.2 percent in the year just ended. The dramatic slowdown in output can be attributed in large part to the pandemic, but Cambodia’s dependence on a narrow range of products, markets, and financing sources left it poorly positioned to absorb the shocks, according to the report, Resilient Development, a Strategy to Diversify Cambodia’s Growth Model.

“Getting back to a sustainable growth path will require an ambitious reform agenda that focuses on improving the capabilities of Cambodia’s firms, workers, and households; strengthening regulations to address market distortions and improve the enabling environment for business; and investing in infrastructure that supports higher quality growth,” said World Bank Country Manager for Cambodia Maryam Salim. “A number of short- and medium-term policy actions can support an economic recovery strategy that will allow Cambodia to build back better after the COVID-19 crisis.”

Five products — garments, footwear, rice, cassava, and tourism — have accounted for 80 percent of Cambodia’s total exports in recent years, while just two markets – the European Union and the United States — take 69 percent of merchandise exports. Labor productivity is low due to low levels of skills and training and low “total factor productivity,” a measure of how efficiently a country uses labor and capital in aggregate. In addition, the country’s low savings rate and low domestic investment have led to a heavy reliance on external financing sources.

Cambodia has many options to address the lack of diversification and build back stronger. Investing in human capital, supporting more efficient resource allocation through improved market institutions, and improving public investment management can help boost productivity. Upgrading contributions to global value chains, creating added value in agriculture, and increasing competitiveness in the services sector could diversify of exports. Promoting higher savings, encouraging foreign investment in the most productive sectors, and improving financial access could support domestic investment.