Despite Strong Growth, Economy Still Fragile

Despite Strong Growth, Economy Still Fragile 

The Cambodia Daily | 8 October 2015

For the past two decades, Cambodia has been among the world’s fastest growing economies—emerging from civil war at rates unparalleled by other post-conflict countries.

In its latest “World Economic Outlook,” released on Tuesday, the International Monetary Fund again predicted continued strong growth, projecting an annual average rate of 7.2 percent until 2020. This places Cambodia at almost double the global average, and just above average for other emerging and developing economies in Asia.

–News Analysis

Economists and development experts, however, say that these promising figures—often cited by the ruling CPP as evidence of their success governing the country—gloss over the need for Cambodia to build a more sustainable growth path.

“[The] future rate of growth will be a big question mark if Cambodia’s economy cannot improve its competitiveness and investment climate,” said David Van, managing director in Cambodia for consultancy firm Bower Group Asia.

“Crucial reforms should be undertaken in labor law, trade union law, judiciary system and investment law but that’s dependable on a strong political will,” Mr. Van said. “Cambodia’s strategic economic vision must come from real business practitioners instead of relying on donors.”

Sophal Ear, author of “Aid Dependence in Cambodia: How Foreign Assistance Undermines De- mocracy,” said that high economic growth rates were to be expected given that Cambodia is experiencing catch-up growth like its regional neighbors Laos and Burma.

“Economic growth is only a number; it doesn’t mean that the growth is equitably distributed or that poverty has even decreased,” he said.

“If development means good change, then that’s one thing, but if it means that a lake is filled-in and someone takes away people’s land, then it cannot be good,” said Mr. Ear, an associate professor at Occidental College in Los Angeles.

Despite strong growth, the country’s ranking on other annual indices of economic development—such as the ease of doing business, competitiveness and corruption—have been consistently poor.

For development experts, this reflects long-term risks to Cambodia’s economy and the need for a focus on inclusive and sustainable growth.

Fragile State

Nate Haken, senior associate at the Fund for Peace (FFP), an NGO based in Washington D.C. that puts out an annual Fragile States Index (FSI), said it was crucial to take a holistic look at development rather than focusing on any single measure, such as economic growth.

“Representative governance, livelihoods, and human security are all equally important in the long run,” he said.

According to the latest FSI released in June, Cambodia remains a relatively fragile state when taking into account “social, economic, political, and security pressures that can contribute to the risk of fragility.”

Cambodia was labeled a “very high warning” state, ranked alongside countries such as Lebanon, Angola and Iran. Over much of the past decade, as Cambodia’s gross domestic product has steadily increased, its score in the FSI gradually deteriorated, and has been flat-lining since 2010 due to economic imbalances and socio-political pressures.

“Inequality, though improving by some measures, is still elevated. Protests and political tensions occurred throughout 2014. Human rights issues including curtailment of press freedoms, politically motivated prosecutions, and arbitrary detentions were also reported,” Mr. Haken said.

Among the factors contributing to the long-term uncertainty around the country’s economy are a lack of industrial diversification, dependence on foreign assistance and the large portion of the population that remains impoverished or on the brink of poverty, experts said.

Jayant Menon, lead economist at the Asian Development Bank’s (ADB) regional integration office, said that Cambodia’s openness to foreign investment and narrow economic structure—with garments making up about 80 percent of exports—may also contribute to its fragility.

“Cambodia is one of the most open economies in the region…and therefore it is vulnerable to conditions beyond its borders,” he said.

“Other Southeast Asian nations have been able to reduce vulnerability…by getting people out of low productivity activities [and] into high productivity manufacturing,” he added.

The reliance on traditional sectors such as garments and agriculture combined with a dependence on international assistance, argue Mr. Ear and others, reduces government accountability and undermines innovative growth strategies.

And the government’s impressive poverty reduction figures—which plunged from 53 percent in 2004 to 19 percent in 2012—also fail to account for the continued vulnerability of much of the population.

“The majority of those people [who escaped poverty] remain highly vulnerable—even to small shocks—which could quickly bring them back into poverty,” the World Bank said in a report last year.

With so many Cambodians still in a dire financial situation, a failure to improve in other areas—such as those noted in the fragility index—could directly impact the economy, said Mr. Menon of the ADB.

“[There is a] perception of increasing disparity and divide within society,” he said. “This can threaten present social harmony and therefore potentially disrupt economic growth.”

Reform

With Cambodia currently on the cusp of the $1,046 per-capita income that divides the World Bank’s “low income” and “lower middle income” classifications, donors and the government have noted the importance of a more robust private sector as foreign aid is scaled back.

Napoleon Navarro, head of policy at the U.N. Development Program (UNDP) in Cambodia, said that while the transition will be a challenge, the government appears to recognize the need to tackle some issues that are contributing to the country’s fragility.

“Our concern is…the ability of Cambodia to move to the next level of development,” he said, adding that “what is going for Cambodia is that the right policies seem to be in place.”

Mr. Navarro cited the Industrial Development Policy, launched by Prime Minister Hun Sen in August, which aims to diversify and grow the country’s manufacturing base while creating more skilled jobs.

Yet some remained skeptical of the implementation, breadth and pace of reforms.

“Cambodia needs to decide whether it wants to grow in the long-term or just keep harvesting low hanging fruit. Right now, it’s still in that latter mode,” said Mr. Ear, the author and academic.

“But that low-hanging fruit will run out. Unless the country gets serious about fighting corruption, and introduces real governance reforms, it has no chance of competing with its neighbors.”