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Cambodia Country Diagnostic Study

Synopsis

Paul Vandenberg

Asian Development Bank2nd Consultation Workshop

4 November 2013, Phnom Penh

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Outline

• Overview of performance• Growth constraints• Inclusiveness • Overview of policy recommendations• Theme chapter: Diversification and upgrading• Q and A

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Economic performance

• Medium to high growth over the past 20 years– High growth in the mid-2000s

• Over 10% for 4 years

– More moderate since the GFC• 7.0 to 7.5% from 2011 to 2014 (ADB)• 7.5% to 2032 (IMF)

– Growing from a low base• 1 of the 8 remaining low-income countries in Asia

• Country Diagnostic Study focuses on:– “sustaining moderate to high growth”– “broadening inclusion”

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Cambodia: GDP Growth (%)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

2

4

6

8

10

12

14

6.4

5.4 5.65.0

11.9

8.8

8.0

6.7

8.5

10.3

13.3

10.810.2

6.7

0.1

6.0

7.1 7.3 7.27.5

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How did it grow?

• Surprising feature of Cambodian economy– Rapid growth with weak supporting factors

• Low human capital• Costly and unreliable power• Transport and logistics bottlenecks• Weak governance/corruption• Narrow production structure

– But also positives• Stable macroeconomics• Political stability

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“Natural growth opportunities”

• Cambodia fully exploited natural growth opprtunities– “comparative advantage conforming” (not “defying”) growth

strategy• Key opportunities

– Resources: land, water, rice culture– Good location at heart of SE Asia – Labor and low wages – attractive to foreign firms– Renowned temple complex– Duty free access to major markets (garments, bikes, rice)– Producers seeking to diversify geographically– Regional and globalized value chain environment

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Sustaining growth

• Growth outlook is positive – but need to improve on the weak supporting factors

• Agriculture– Under the Rice Policy, a wide-ranging industrial policy for rice

• Industry– Continued improvements in the investment climate (power

supply, regulatory, export/import infrastructure, governance)• Services

– Problem of “one-time tourism” and “temple tourism”• Diversify and upgrade

– Positive “image effect” from Minebea, bicycles, others

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Growth constraintsFramework

Low social returns Low appropriability – market failure

1. Poor geography 6. Coordnation externalities

2. Low human capital 7. Information externalities

3. Poor infrastructure Finance

Low appropriability – gov’t failure 8. Bad international finance

4. Micro risks 9. Low doemstic savings

5. Marco risks 10. Poor intermediation

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Low social returnsKC= constraint, C: Constraint, MC: Minor Constraint, NC: not a constraint

• Geography - NC– situated in emerging region, sea access, land and water

resources– Petroleum yet unexploited

• Human capital - KC– Weak basic education – notably secondary school – Skill levels low, weak TVET

• Infrastructure - KC– Power is the weak link: high cost, low coverage– Main road arteries developed but need better rural roads – Railway being rehabilitated

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Governance

• Micro risks– Property rights - NC

• Generally protected, for main domestic and foreign business

• But improvements in rule of law needed • Land concessions (LC) a concern

– Corruption - KC• Key problem for investors and businesspeople• Some improvement in recent years

– Tax rate - NC• Not high

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Governance

• Macro risks– Monetary management - NC• Stable, reasonable inflation

– Fiscal issues - KC • Constrained by resources, limited tax base• Fiscal management improving

– Foreign debt - NC• Debt-to-GDP at 30%, down from 60% in 2000• Need Paris Club agreements to write-off non-serviced

debt

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Market failure

• Coordination externalities - NC– Rice Policy is major attempt at coordination– Government-Private Sector Forum is a model for region– Resulted in improvements in trade/logistics and other

areas, notably garments and rice• Information externalities - NC – Recent non-garment FDI encourages potential investors

that cost structure adequate for profitability – Wages, tariff preferences well-known– Prepared for high energy costs, low human capital

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Finance

• Foreign finance - NC– Government borrows from multilateral banks– FDI an important source of investment– Foreign banks have set up operations Cambodia

• Domestic savings - C– Savings are very low, about 12% of GDP

• Intermediation - MC– Interest rate spreads are high, about 14%– Cost, not access, cited by business– But considerable credit expansion in recent years– Branches doubled between 2006 and 2011

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Area Evaluation Constraint

1. EnvironmentGEOGRAPHY

Good location, sea access,available land/water resources

2. Social investment:INFRASTRUCTURE

Energy price high, coverage lowRural roads, and railway need improvement

Key Constraint

3. Social investment:HUMAN CAPITAL

Improved primary coverage, better quality and completion at secondary, skills mismatch

Key Constraint

4. Gov’t: MICRO POLICY

Governance a concern, need to reduce corruption Key Constraint

5. Gov’t: MACROECONOMICS

Relatively stable but overhang fear from GFCInflation in check, debt sustainable, but low revenues

6. Market failure: INFORMATION EXT.

New non-garment FDI providing cost discoveryMay snowball

7. Market failure: COORDINATION EXT

Government coordiation fairly well developed through G-PSF, Rice Policy a major initiative

8. Finance: SAVINGS

Savings remains lowReduces funds for investment

Constraint

9. Finance: INTERMEDIATION

Interest rates relatively high, limited access to SMEsBut expansion of credit

Minor Constraint

10. Finance: INTERNATIONAL

Relies on donors finance and FDI Foreign banks setting up

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Inclusiveness Framework

Employment Uneven playing field

1. Access to employment 6. Access to infrastructure

2. Access to good jobs 7. Access to productive assets – credit, land

Weak human capabilities Social saftey nets

3. Access to education 8. Access to social security, protection

4. Access to health

5. Access to other social services

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Employment

• Access to employment – Labor force participation rate highest in Asia at 88%– 10 pp higher than other high-LFP countries

• 20 pp above most others

– Open unemployment is low, < 0.5% • Access to decent jobs – About 70% of employment is informal

• own-account, unpaid family members, casual

– Under-employment is surprisingly low: about 5%– Significant improvement in “regular work”

• from 26% to 32% in 2007-2011

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Human capabilities

• Access to education– Attainment among workforce low (81% not more than primary)– Low enrolment for lower (35%) and upper (20%) secondary school– Skill mismatch in technical and higher education

• Access to health care– Outcomes lowest/among lowest in region– Life expectancy lowest in SE Asia, maternal mortality highest– Infant and child mortality lower only than Myanmar– Major concern with under-nutrition

• Access to other social services– Water and sanitation outside of PP a major health concern

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Uneven playing field

• Infrastructure – Limited access to electricity in rural areas– Improved roads needed in rural areas

• Land – 83% of rural households own land– Questions about allocation of land under Land Concessions

• Irrigation – Less than 50% of farmed of land is irrigated– Only 7% of land is irrigated in both wet and dry season

• Credit– Poor households have limited access to formal credit– Informal sources used, microfinance has expanded considerably

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Social safety nets

• Access to social protection– Overall coverage of social protection is 3.2% of the

population• 1.7% for lowest income quintile

– Share of government spending on social security risen from 2.4% to 5.2% in 2000-2011

– Number of recent initiatives• National Social Security Fund for Civil Servants, 2008• National Social Security Fund (for private sector) 2008

– covers about 9% of the labor force

• National Social Protection Strategy, 2011

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Area Evaluation Constraint to inclusiveness

1. EmploymentACCESS TO EMPLOYMENT

Unemplyment lowUnderemployment low

2. Employment ACCESS TO GOOD JOBS

Informality in labor market remains highBut formal work has developed

Key Constraint

3. Human capabilities ACCESS TO EDUCATION

Limited access to secondary educationSkills mismatches

Key Constraint

4. Human capabilitiesACCESS TO HEALTH

Low access to health services Key Constraint

5. Human capabilitiesACCESS TO SOC. SERVICES

Limited access to water and sanitation outside PP Key constraint

6. Uneven playing field ACCESS TO INFRASTRUCTURE

Rural electrification lowLimited rural transports links

Key constraint

7. Uneven playing field ACCESS TO PRODUCTIVE ASSETS

Decent access to land but problems of land concessionsLimited access to formal credit for some

8. Social safety nets ACCESS TO SOCIAL SECURITY, PROTECTION

Coverage lowMajor new programs put in place, but coverage needs to be expanded

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Recommendations

• Transport – Focus on rural roads to rural-to-urban, farm-to-

market linkages and access to social services– Seek to leverage private financing to support the

large transport needs – Finalize the rehabilitation of the railway to reduce

wear and tear on road system– Provide integrated system planning for a strategic

orientation– Leverage donor funding

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Recommendations

• Energy– Support the integration of regional grids into a national

network– Plan an affordable tariff policy, in rural areas but also

business, as new lower cost power comes on stream– Adapt the role of the Rural Electrical Enterprises to the

expansion of grid coverage– Ensure that power generation projects in the pipeline

are completed and become operational– Seek additional financing to meet the goals of

electrification

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Recommendations

• Human capital– Improve reproductive, maternal, new born and

child health services– Focus child nutrition, including traditions/culture– Increase enrolment in and completion of secondary

school– Improve training and wages for teachers– Provide the framework for TVET through

accreditation and competency-based skills standards

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Recommendations

• Governance– Strengthen and provide support from the highest

levels to Anti-Corruption Unit– Ensure penalties are sufficient for deterrence– Strengthen the procedures of public financial

management– Promote accountability in the process of de-

concentration and decentralization

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Recommendations

• Water and sanitation– Upgrade access in rural areas and secondary

towns to improve health and reduce disease – Use Phnom Penh as a model

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Diversification and upgradingTheme chapter

• Why is diversification is important?– More stable production/output base– Reduced instability when market turbulent for one product– Correlated to higher growth/income level – to a point– Inter-sector diversification important for long-term

development • Why upgrade the sophistication of the product mix?

– More sophisticated products linked to higher GDP, increased export receipts

– Higher labor productivity, paying better wages, increasing household income

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Cambodia’s concernsTheme chapter

• Four main sectors– Paddy/rice, garments, tourism and construction– Low sophistication

• Vulnerable to markets and competition – Vulnerable to market changes (price, demand)– GFC resulted in large (but short) demand drop in garments – Vulnerable to other low-cost producers (MYA)

• Vulnerable to graduating from trade preferences – To EU under GSP program Everything But Arms – With high growth, will lose access to EBA

• no longer LDC by about 2017 + 3-year grace period

– U.S. labor-linked garment program (BFC) may continue

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SophisticationTheme chapter

• Little increase in sophistication for a decade– Based on “product space” analysis– Substantially below VN, slightly above LAO, MYA

• 98% exports in 2 lowest quintiles of sophistication– Compared to VN at 53%– But shift occurring from 5th to 4th quintile

• Goods with revealed comparative advantage– Increased marginally from 52 to 53 since 2001

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Diversification promotionTheme chapter

• Rice policy– Good example of integrated agro/agro-processing policy

• Special Economic Zones (SEZs)– Receptor for FDI– Addresses main barriers (regulation, power, etc.)

• Trade promotion measures– Streamlined trade procedures– Support to potential exporters

• Qualified Investment Projects– Profit tax exemption and other incentives– Duty free import of machinery, construction materials, inputs

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Policy suggestions Theme chapter

• Support agriculture– Research and extension– Understand domestic value chains and address bottlenecks– Assess market potential of new crops, fish, etc.

• Diversify to proximate products– Leverage existing FDI-based light assembly– Promote clusters and provide the support

• Leverage current trade preferences– 7-year window of opportunity will close 2020– Need to become competitive w/o preferences by then– Avoid the “Fiji problem”

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Thank You

• Questions and comments