Abstract
This Selected Issues paper and Statistical Appendix examines the main developments in the real sector of Cambodia since the mid-1990s. The paper describes the path of overall GDP growth since 1994, and discusses key sectoral developments and constraints that hamper further expansion of rice output and exports as well as the private sector development. The paper reviews inflation and labor market developments since 1998. It also provides a fresh look at fiscal developments in Cambodia since the early 1990s.
I. Economic Growth and Sectoral Developments1
1. Cambodia has undergone dramatic political, economic and social changes since 1993, the year of the first post conflict national elections leading to a first coalition government. The single-party state has since then been replaced by a democratic system, with two national elections held, the first-ever communal elections completed in early 2002, and the next national elections slated for July 2003. Meanwhile, Cambodia has joined various international and regional organizations and is expected to become a member of the World Trade Organization (WTO) in the near future, thus fostering its integration in the world economy. Crucial institutional and economic reforms have also been undertaken.
2. Reconstruction efforts were stalled temporarily in 1997 as a result of civil strife, but resumed at a faster pace in 1999, in the wake of the formation of a second coalition government and the launching of a wide-ranging economic reform program supported by the international community. Although political and macroeconomic stability have been achieved and key structural reforms have been initiated, Cambodia’s economy remains vulnerable and faces daunting challenges to alleviate pervasive poverty, especially in rural areas, where the poor predominantly live. Economic growth remains narrowly-based on the garment industry, and is threatened by lower productivity in agriculture and manufacturing than in neighboring countries. External shocks stemming from lower global growth and the accelerated recurrence of flooding and droughts in recent years also pose major challenges to Cambodia’s development.
3. This chapter highlights the main developments in the real sector since the mid-1990s. Section A describes the path of overall GDP growth since 1994. Section B discusses key sectoral developments and constraints that hamper further expansion of rice output and exports as well as private sector development. Section C reviews inflation and labor market developments since 1998. Section D concludes.
A. GDP Growth during 1994-2002
4. Economic growth has generally been robust, averaging about 6 percent during 1994-2001. Cambodia experienced a steep downturn in 1998, with GDP growth bottoming at 2.1 percent, as a result of political violence in mid-1997. Economic growth, however, has recovered markedly since 1999, with annual GDP growth averaging 7 percent during 1999-2001. Output growth, however, is expected to have slowed to 4½ percent in 2002, owing to the impact on agriculture of a severe drought combined with flooding. Economic recovery since 1999 has been primarily led by the rapid development of the garment industry, mostly benefiting urban areas. Agriculture, the most predominant sector as a share of GDP and the labor force, has expanded by about 3½ percent annually in real terms during 1994-2001, compared with total population growth of 2½ percent, experiencing large year-to-year fluctuations, especially in the last three years, owing to adverse weather conditions. The impressive growth performance in the manufacturing sector (about 20 percent annually during 1994-2001) primarily mirrors buoyant garment output since 1997. Services grew by only about 1½ percent annually during 1994-1998, but increased to more than 5 percent during 1999-2001, reflecting soaring tourist arrivals.
Cambodia: Real GDP Growth, 1994-2001 1/
(Annual growth rates; in percent)
National account statistics are based on estimates prepared by the National Institute of Statistics, with support from the AsDB. See “National Accounts of Cambodia, 1993-2001,” Bulletin No. 6, April 2002. While weaknesses in the data remain, substantial improvements have been made in recent years, including with support of technical assistance from the Fund under the TCAP program.
Including textile, wearing apparels, and footwear. The garment industry accounts for about 90 percent of the sub-sector’s value-added.
Cambodia: Real GDP Growth, 1994-2001 1/
(Annual growth rates; in percent)
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | Average | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 94/98 | 99/01 | |||||||||||
| Real GDP growth | 7.7 | 5.9 | 4.6 | 4.3 | 2.1 | 6.9 | 7.7 | 6.3 | 4.9 | 7.0 | ||
| Agriculture | 10.4 | 4.4 | 2.3 | 5.5 | 3.0 | 0.0 | −0.3 | 3.9 | 5.1 | 1.2 | ||
| Industry | 6.0 | 20.9 | 9.9 | 21.3 | 7.3 | 13.2 | 34.6 | 15.5 | 13.1 | 21.1 | ||
| Services | −0.5 | 5.7 | 3.6 | −2.6 | 0.7 | 7.1 | 5.8 | 2.7 | 1.4 | 5.2 | ||
| Real GDP growth | ||||||||||||
| Excluding: | 5.3 | 7.3 | 6.6 | 3.3 | 1.4 | 12.9 | 13.9 | 7.9 | 4.8 | 11.6 | ||
| Agriculture | 5.3 | 5.7 | 3.8 | 2.1 | 0.4 | 4.9 | 2.1 | 3.5 | 3.6 | 3.5 | ||
| Textile 2/ | ||||||||||||
| Textile and agriculture | 5.8 | 7.0 | 5.2 | −0.8 | −2.0 | 9.7 | 4.3 | 3.2 | 3.0 | 5.7 | ||
National account statistics are based on estimates prepared by the National Institute of Statistics, with support from the AsDB. See “National Accounts of Cambodia, 1993-2001,” Bulletin No. 6, April 2002. While weaknesses in the data remain, substantial improvements have been made in recent years, including with support of technical assistance from the Fund under the TCAP program.
Including textile, wearing apparels, and footwear. The garment industry accounts for about 90 percent of the sub-sector’s value-added.
Cambodia: Real GDP Growth, 1994-2001 1/
(Annual growth rates; in percent)
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | Average | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 94/98 | 99/01 | |||||||||||
| Real GDP growth | 7.7 | 5.9 | 4.6 | 4.3 | 2.1 | 6.9 | 7.7 | 6.3 | 4.9 | 7.0 | ||
| Agriculture | 10.4 | 4.4 | 2.3 | 5.5 | 3.0 | 0.0 | −0.3 | 3.9 | 5.1 | 1.2 | ||
| Industry | 6.0 | 20.9 | 9.9 | 21.3 | 7.3 | 13.2 | 34.6 | 15.5 | 13.1 | 21.1 | ||
| Services | −0.5 | 5.7 | 3.6 | −2.6 | 0.7 | 7.1 | 5.8 | 2.7 | 1.4 | 5.2 | ||
| Real GDP growth | ||||||||||||
| Excluding: | 5.3 | 7.3 | 6.6 | 3.3 | 1.4 | 12.9 | 13.9 | 7.9 | 4.8 | 11.6 | ||
| Agriculture | 5.3 | 5.7 | 3.8 | 2.1 | 0.4 | 4.9 | 2.1 | 3.5 | 3.6 | 3.5 | ||
| Textile 2/ | ||||||||||||
| Textile and agriculture | 5.8 | 7.0 | 5.2 | −0.8 | −2.0 | 9.7 | 4.3 | 3.2 | 3.0 | 5.7 | ||
National account statistics are based on estimates prepared by the National Institute of Statistics, with support from the AsDB. See “National Accounts of Cambodia, 1993-2001,” Bulletin No. 6, April 2002. While weaknesses in the data remain, substantial improvements have been made in recent years, including with support of technical assistance from the Fund under the TCAP program.
Including textile, wearing apparels, and footwear. The garment industry accounts for about 90 percent of the sub-sector’s value-added.
5. On the expenditure side, domestic demand as a share of GDP has been broadly stable since 1994, with excess demand equivalent to about 10-15 percent of GDP financed from foreign savings. The share of overall consumption has been broadly stable at about 94-98 percent of GDP since 1997. Government consumption has been contained at below 6 percent of GDP since 1995, owing to cuts in nonwage current expenditure. Domestic investment in relation to GDP ranged from 11 percent to 18 percent of GDP in 1994 and 2001, respectively. The national saving rate rose gradually during 1994-2001 to reach about 13 percent of GDP in 2001.
Cambodia: Aggregate Demand and Savings at Current Prices, 1994-2001
(In percent of nominal GDP)
Including statistical discrepancy.
Cambodia: Aggregate Demand and Savings at Current Prices, 1994-2001
(In percent of nominal GDP)
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Domestic demand 1/ | 110.7 | 115.6 | 115.0 | 107.8 | 109.0 | 108.7 | 111.9 | 112.0 | ||
| Consumption 1/ | 99.7 | 102.2 | 101.4 | 93.5 | 97.7 | 92.9 | 98.4 | 94.1 | ||
| Private 1/ | 92.5 | 97,1 | 95.4 | 87.9 | 92.8 | 87.6 | 92.7 | 88.1 | ||
| Government | 7.2 | 5.1 | 6.0 | 5.7 | 5.0 | 5.3 | 5.7 | 6.0 | ||
| Investment | 11.0 | 13.4 | 13.6 | 14.3 | 11.3 | 15.9 | 13.5 | 17.9 | ||
| Foreign balance (net) | −10.7 | −15.6 | −15.0 | −7.8 | −9.0 | −8.7 | −11.9 | −12.0 | ||
| Gross domestic savings | … | 2.6 | 1.4 | 3.8 | 3.3 | 5.8 | 8.9 | 10.6 | ||
| Gross national savings | … | 8.3 | 7.9 | 13.2 | 9.1 | 13.6 | 9.2 | 12.6 | ||
Including statistical discrepancy.
Cambodia: Aggregate Demand and Savings at Current Prices, 1994-2001
(In percent of nominal GDP)
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Domestic demand 1/ | 110.7 | 115.6 | 115.0 | 107.8 | 109.0 | 108.7 | 111.9 | 112.0 | ||
| Consumption 1/ | 99.7 | 102.2 | 101.4 | 93.5 | 97.7 | 92.9 | 98.4 | 94.1 | ||
| Private 1/ | 92.5 | 97,1 | 95.4 | 87.9 | 92.8 | 87.6 | 92.7 | 88.1 | ||
| Government | 7.2 | 5.1 | 6.0 | 5.7 | 5.0 | 5.3 | 5.7 | 6.0 | ||
| Investment | 11.0 | 13.4 | 13.6 | 14.3 | 11.3 | 15.9 | 13.5 | 17.9 | ||
| Foreign balance (net) | −10.7 | −15.6 | −15.0 | −7.8 | −9.0 | −8.7 | −11.9 | −12.0 | ||
| Gross domestic savings | … | 2.6 | 1.4 | 3.8 | 3.3 | 5.8 | 8.9 | 10.6 | ||
| Gross national savings | … | 8.3 | 7.9 | 13.2 | 9.1 | 13.6 | 9.2 | 12.6 | ||
Including statistical discrepancy.
B. Sectoral Developments
Agriculture, Forestry and Fisheries
6. Cambodia’s economy remains largely based on agriculture, which accounted for about 37 percent of GDP in 2001 and employed about 80 percent of the labor force. About 80 percent of the poor live in rural areas, but monthly rural household income have remained very low. Agricultural growth has on average lagged behind population growth since 1999, and experienced large year-on-year fluctuations, reflecting insufficient investment in the sector, over-exploitation of natural resources, and poor weather conditions. Productivity in this sector is weak in comparison with neighboring countries with comparable soil and weather conditions. The predominance of rainfed agriculture subjects production to high weather vulnerability. Rainfed rice is the main crop, covering about 90 percent of cultivated areas. Official exports are limited to rubber and fish but large amounts of paddy rice are exported illegally.2
7. The main factors restraining agricultural sector growth are as follows. First, most land holdings are small (0.75-1.0 hectare) and the lack of secured access and ownership to land reduces farmers’ incentive to invest. Second, productivity is lower than in neighboring countries with similar soil and weather conditions owing to inadequate access to fertilizers and seeds, under-developed irrigation facilities which entail excessive reliance on rainfed crops, and high transportation costs stemming from the poor condition of rural roads. Third, the lack of rural financial services raises production and distribution costs whereas exporters have to pay unofficial fees to avoid delays in obtaining export authorizations. Fourth, large areas remain covered with landmines and unexploded ordnances, preventing effective land use.
8. Rice is the main agricultural output, the staple of the Cambodian diet as well as a major source of income and subsistence for Cambodian farmers. About 2.3 million hectares (i.e., 90 percent of the total cropped area of 2.5 million hectares) is planted with rice. Rice is cultivated primarily through traditional farming practices by over 80 percent of Cambodian farmers, 60 percent of whom produce for subsistence needs. Rice production is predominantly rainfed. Rice output accounted for about 46 percent of agricultural output in 2001 and 17 percent of GDP. Significant productivity gains have been achieved since the 1960s when rice productivity was only 1.1 to 1.3 tons/ha, although productivity (currently 2 tons/ha) still remains lower than in Vietnam and Thailand (3-4 tons/ha). Cambodia has reached rice self-sufficiency since 1995 (producing about million metric tons); however, some areas are occasionally faced with shortages as a result of deficiencies in rice marketing arrangements. Official rice exports are minimal but unofficial paddy (unmilled) rice exports from border regions are estimated at 300,000 tons (about 10 percent of yearly production). Rice output could be increased further through the use of high-yield varieties of seeds and fertilizer, development of irrigation facilities in some areas, and improvements in marketing arrangements. The main constraints to rice production and marketing are magnified in Box 1. The number of intermediaries between farmers and consumers is excessive, resulting in upward pressure on rice prices paid by consumers.
Cambodia: Main Constraints to Rice Production and Marketing 1/
Producers
Land Tenure. Only 10 percent of farmers hold legal land titles. The resulting insecurity in tenure discourages investment (e.g., irrigation infrastructure) needed for improving productivity.
Fertilizer and Pesticide. The access to fertilizers and pesticides is constrained by poor infrastructure and oligopolistic practices of official suppliers.
Irrigation Facilities. The poor design and performance as well as deficient maintenance of existing irrigation schemes, and the lack of investment in new irrigation systems are significant impediments.
Access to Financing. The lack of affordable credit implies that farmers need to sell their crop shortly after the harvest when the prices are lowest.
Collectors
Collectors are small private enterprises operating on small margins. Collector constraints include inadequate price and information and lack of access to credit and capital financing.
Millers
Custom mills are constrained by the lack of continuity in the flow of paddy supply and are facing increased competition from commercial mills. In contrast, commercial mills face limited access to working capital, uneven quality of paddy, and outdated second-hand equipment from Vietnam and China.
Traders
Domestic market sales and exports are hampered by high transportation costs resulting from poor infrastructure and unofficial fees. Unofficial costs in the transport and clearance of rice for exports account for about 50 percent of export costs, thus drastically reducing the competitiveness of Cambodian rice.
Retailers
Poor infrastructure and a distribution system concentrated among a small group of traders and wholesalers are major impediments for retailers. Significant competition among retailers results in low retail margins.
1/ Based on the findings in “Rice Value Chain Study: Cambodia. Executive Summary Prepared for the World Bank” Agrifood Consulting International, September 2002.9. Rubber is currently the second most important export for Cambodia following the sharp reduction in forestry exports. Rubber trees are grown in three types of rubber plantations: (i) large state-owned estates; (ii) smallholdings; and (iii) one large private plantation. The seven large state-owned rubber plantations were established in the 1920s during colonial times and nationalized upon the country’s independence from France. Up to 1995, all the state-owned rubber plantations were directly managed by the General Directorate of Rubber Plantations. The government, however, started divesting from rubber plantation management in the mid- I990s. As a result, the seven state-owned rubber plantations now operate as autonomous State-Owned Enterprises (SOEs), and have been slated for privatization. State-owned rubber plantations cover about 45,000 ha yielding about 45,000 tons of rubber annually, with the two biggest plantations covering 30,000 ha. The bulk of rubber trees, however, was planted in the 1950s. Rubber trees need to be replaced every 20 years, but replanting was only initiated in 1995, which was expected to have a positive impact on rubber output after 5-6 years. Smallholdings rubber plantations are being developed with World Bank and French government support. However, no information on smallholdings’ rubber output is available.
10. Rubber is profitable, especially for smallholders, owing to low operating costs. In addition, smallholders can derive continued income stream during the year, as rubber collection is not affected by seasonal patterns. Smallholders’ output, however, is mainly constrained by rubber marketing regulations whereby they are required to sell their output at a low price to the state-owned rubber plantations. As a result, smallholders generally prefer to sell their production to private intermediaries who in turn smuggle Cambodian rubber to neighboring countries. Rubber production is also adversely affected by the lack of official rubber quality certification arrangements in line with international standards, resulting in 15-20 percent discounts below international prices. Efforts are underway to validate the good quality of Cambodia’s rubber, through the international certification from the International Rubber Association in Malaysia. The government would need to mandate the use of international quality certification as a benchmark for rubber trading.
11. Other crops include maize, soybean, vegetables and fruit. Domestic production is limited, despite Cambodia’s potential in that area, partly because vegetables are not traditionally part of the national diet. As a result, the bulk of vegetables consumed in Cambodia is imported from Vietnam. Efforts to increase vegetable production and consumption are underway, supported by UNICEF, with a view to raising the nutritional content of the national diet. Vegetable cultivation is labor intensive and more income-generating than rice cultivation. Cambodia has also a still untapped potential for fruit production, as most fruit is also imported from Vietnam.
12. Livestock and poultry output accounted for about 6 percent of GDP in 2001; production is mostly carried out in small-scale traditional farms. The sub-sector has grown by about 3 percent annually since 1994. Livestock production during 1999-2001 was affected by droughts and flooding. Cambodian farmers generally consider raising livestock as an opportunity to earn additional, rather than as a main source of, income. Cambodia has also a low potential for meat agro-processing because livestock raising is generally limited to buffaloes used for rice farming.
13. Forestry contribution to GDP declined gradually from 7.7 percent in 1994 to 5.4 percent in 1998 and to about 2 percent in 2001. This rapid contraction stems from overexploitation in the mid-1990s, stepped-up enforcement of the ban on illegal logging since 1999, and low world prices. Although valuable forests have declined extensively, Cambodian forests, still cover about 10 million hectares (57 percent of the country’s total area), of which about 50 percent are privately managed under long-term concession contracts. Anticipated slow recovery in world prices and continued forestry reform arc expected to constrain forestry output growth in the medium term. Timber royalties were increased in 1999, from $14 to $54 per cubic meter. Collections of royalties, however, have been short of expectations, and corrective actions have been initiated following a comprehensive review in mid-2002. Revision of royalty collection procedures and the royalty system is underway with World Bank support.
14. Forestry has been a politically difficult area since the early 1990s. In response to widespread illegal logging and over-exploitation in the mid-90s, the government has sharply curtailed the scope of logging activity, canceling several forestry concessions, and banning logging and log transportation as of end-December 2001 and May 2002, respectively. The logging and transportation bans are expected to last until concession restructuring plans are approved by the government within a transparent process involving full disclosure of the plans. The new Forestry Law adopted in mid-2002 established the legal ground for sustained management of forestry resources but key regulations are still pending. Despite continued sporadic illegal logging, the scale of illegal forestry activities has been reduced compared to the situation that prevailed during 1996-98. However, the government’s fundamental reform objective to establish a forestry concession system based on sustainable practice has not yet been achieved. Thirteen forestry concessions have submitted sustainable management plans to the Department of Forestry in October 2002, including social impact assessments.
15. The Forest Crime Monitoring Unit (FCMU) established in 1999 was initially expected to be crucial for strengthening governance in forestry management, especially in view of the assistance provided by an independent NGO (Global Witness). The FCMU, however, has not been able to effectively address the underlying causes for forestry crimes, including: (i) corruption; (ii) active border markets for Cambodian forest products and ; (iii) the involvement of armed groups in illegal logging and ; (iv) limited capacity in regulatory agencies. The efficiency of the FCMU was also undermined by continued bickering between Department of Forestry officials and foreign experts assigned to the FCMU. Donor support to the FCMU was suspended in late 2002, pending an external review of FCMU operations. The government announced in December 2002 the termination of Global Witness as the independent monitor. The selection of a new independent monitor is still pending.
16. Fisheries is the fourth largest sub-sector, accounting for about 12 percent of GDP in 2001, and is an important source of income and employment. Fisheries output has grown by about 50 percent since 1994, although officially-recorded annual catches are believed to be significantly underreported (300,000 tons vs, 400,000 tons under recent unofficial estimates). Until late 2000, the bulk of fishing areas covering about one million hectares was allocated to private concessions involved in large-scale fishing on exclusive fishing lots in the Tonle Sap Lake. Access to fishing areas by local communities, however, was expanded in 2001 and has given rise to a rapid increase in medium-and small-scale fishing. Overexploitation of some fish species has emerged in recent years, owing to mismanagement of fishing lots and rapid increase in medium- and small scale fishing. A new Fisheries Law and a Fisheries Master Plan are under preparation to ensure adequate management of fisheries resources in the future.
17. Land management is crucial for strengthening agricultural output and alleviating poverty, especially in rural areas. Insecure land ownership stemming from an inadequate legal and regulatory framework and from outdated information on land titling, has been a major impediment to rural development and the use of land as collateral in financial transactions. A new Land Law was prepared under a participatory process and promulgated in July 2001, thus paving the way for improvements in this area. Several accompanying regulations, however, are still under preparation and are expected to be completed by 2003. Nevertheless, noticeable progress has been made in land mapping and registration since the adoption of the Land Law.
Industry
18. Industrial activity accelerated rapidly during 1994-2001, averaging 13 and 25 percent annually during 1994-98 and 1999-01, respectively. Industrial output accounted for 22 percent of GDP in 2001 as against 12 percent in 1994. Industrial output was largely driven by textile and wood processing activities up to 1997. Thereafter, the garment industry became the main engine of industrial growth, as wood processing activities collapsed in the aftermath of forestry reform.
19. The garment industry has been the fastest growing sector since 1994 and a major source of foreign exchange earnings, and employment creation, and the main recipient of foreign direct investment, Growth of the garment industry accelerated after 1997, largely as a result of the signing of the Normalized Trade Relationship (NTR) with the European Union (EU) and the United States, in 1996 and 1997, respectively (See Chapter V). Further development of the garment industry is constrained by higher wages than in main competitor countries, high unofficial fees, and the prospects of phasing out the quota in 2005, in connection with WTO arrangements on textile and apparels.
Cambodia: Garment Market, 1994-2002
(In millions of U.S. dollars)
Cambodia: Garment Market, 1994-2002
(In millions of U.S. dollars)
| Years | Exports | |||||
|---|---|---|---|---|---|---|
| United States | European | Other | Total | |||
| Total | Quota | Non-Quota | Union | Markets | ||
| 1994 | 0 | … | … | 4 | … | 4 |
| 1995 | 1 | … | … | 27 | … | 28 |
| 1996 | 2 | … | … | 75 | … | 77 |
| 1997 | 99 | … | … | 112 | … | 211 |
| 1998 | 360 | … | … | 76 | … | 436 |
| 1999 | 516 | 433 | 83 | 138 | 7 | 661 |
| 2000 | 751 | 524 | 227 | 221 | 14 | 986 |
| 2001 | 829 | 502 | 327 | 309 | 18 | 1,156 |
| 2002 | 961 | 627 | 334 | 361 | 28 | 1,350 |
Cambodia: Garment Market, 1994-2002
(In millions of U.S. dollars)
| Years | Exports | |||||
|---|---|---|---|---|---|---|
| United States | European | Other | Total | |||
| Total | Quota | Non-Quota | Union | Markets | ||
| 1994 | 0 | … | … | 4 | … | 4 |
| 1995 | 1 | … | … | 27 | … | 28 |
| 1996 | 2 | … | … | 75 | … | 77 |
| 1997 | 99 | … | … | 112 | … | 211 |
| 1998 | 360 | … | … | 76 | … | 436 |
| 1999 | 516 | 433 | 83 | 138 | 7 | 661 |
| 2000 | 751 | 524 | 227 | 221 | 14 | 986 |
| 2001 | 829 | 502 | 327 | 309 | 18 | 1,156 |
| 2002 | 961 | 627 | 334 | 361 | 28 | 1,350 |
Services
20. The services sector has experienced uneven and modest growth since 1994, averaging about 2.8 percent annually. The share of the services sector in GDP has remained broadly stable since 1994 at around 35 percent of GDP, ranking slightly behind agriculture in recent years. Trade is the predominant subsector (10 percent of GDP) followed by transport and communications (7 percent). The contribution of tourism to GDP remains low (4 percent) despite high growth since 1999, implying that thus far the domestic value added in the sector has been limited.
21. Tourism expanded rapidly in the early 1990s, when Cambodia reopened its borders after more than two decades of war and civil strife. Tourism expansion was particularly impressive until 1996, with annual growth rates of tourist arrivals ranging from 30 to 40 percent. The inflow of tourists, however, slowed drastically in 1997 in the wake of political turmoil, and did not resume until after the national elections held in late 1998. The subsequent formation of a stable coalition government and the 1997 “open skies” policy whereby international airlines were allowed to fly to Siem Reap, were instrumental in renewing tourist arrivals. Tourist arrivals by air totaled 408,000 in 2001, compared with 118,000 tourists in 1993, and 260,000 in 1996, and reached an all-time high of 790,000 in 2002. Although about 70 percent of tourists arrive in Cambodia by air, an increasing number of foreign tourists visit the country by road from neighboring countries or by ship. About 60 percent of foreign tourists coming by air are from the Asia and Pacific region, with the largest share (12 percent) from Japan, while Europeans and North and South Americans account for about 25 and 15 percent of air arrivals, respectively. While tourism receipts have increased dramatically, the average spending per tourist and length of stay are much lower than in Thailand and Malaysia. Hotel accommodation seems adequate in the short term. There is significant potential for further development of tourism in Cambodia, as many temples are still inaccessible, and the infrastructure for ecotourism is underdeveloped. Domestic tourism would also likely develop rapidly if roads were rehabilitated.
Cambodia: Main Indicators of Tourism, 1994-2001
Based on arrivals at Phnom Penh airport only.
Cambodia: Main Indicators of Tourism, 1994-2001
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Total visitor arrivals | |||||||||||
| (In thousands) | … | … | … | … | … | 367.7 | 466.4 | 604.9 | |||
| Of which: | |||||||||||
| By air | 176.6 | 219.7 | 260.5 | 218.8 | 186.3 | 262.9 | 351.7 | 408.4 | |||
| (Percent change) | … | (24.4) | (18.6) | (-16.0) | (-14.9) | (41.1) | (33.8) | (16.1) | |||
| Other | … | … | … | … | … | 104.8 | 114.7 | 196.5 | |||
| Share by regional | |||||||||||
| origin | |||||||||||
| (In percent) 1/ | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Asia and Pacific | 64.6 | 71.5 | 68.4 | 68.7 | 61.1 | 58.5 | 58.7 | 59.3 | |||
| Europe | 20.7 | 17.3 | 20.6 | 19.8 | 26.2 | 25.6 | 24.8 | 24.1 | |||
| Americas | 13.6 | 9.8 | 10.7 | 11.2 | 12.4 | 15.5 | 15.9 | 16.0 | |||
| Other | 1.1 | 1.4 | 0.3 | 0.3 | 0.3 | 0.4 | 0.6 | 0.6 | |||
| Tourism receipts | |||||||||||
| In million US dollars | … | 53 | 82 | 68 | 66 | 133 | 199 | 235 | |||
| In percent of GDP | … | 1.7 | 2.6 | 2.2 | 2.2 | 4.0 | 5.9 | 6.9 | |||
| Average receipt per | |||||||||||
| tourist (In US$) | … | 327 | 422 | 417 | 465 | 666 | 950 | 701 | |||
Based on arrivals at Phnom Penh airport only.
Cambodia: Main Indicators of Tourism, 1994-2001
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Total visitor arrivals | |||||||||||
| (In thousands) | … | … | … | … | … | 367.7 | 466.4 | 604.9 | |||
| Of which: | |||||||||||
| By air | 176.6 | 219.7 | 260.5 | 218.8 | 186.3 | 262.9 | 351.7 | 408.4 | |||
| (Percent change) | … | (24.4) | (18.6) | (-16.0) | (-14.9) | (41.1) | (33.8) | (16.1) | |||
| Other | … | … | … | … | … | 104.8 | 114.7 | 196.5 | |||
| Share by regional | |||||||||||
| origin | |||||||||||
| (In percent) 1/ | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Asia and Pacific | 64.6 | 71.5 | 68.4 | 68.7 | 61.1 | 58.5 | 58.7 | 59.3 | |||
| Europe | 20.7 | 17.3 | 20.6 | 19.8 | 26.2 | 25.6 | 24.8 | 24.1 | |||
| Americas | 13.6 | 9.8 | 10.7 | 11.2 | 12.4 | 15.5 | 15.9 | 16.0 | |||
| Other | 1.1 | 1.4 | 0.3 | 0.3 | 0.3 | 0.4 | 0.6 | 0.6 | |||
| Tourism receipts | |||||||||||
| In million US dollars | … | 53 | 82 | 68 | 66 | 133 | 199 | 235 | |||
| In percent of GDP | … | 1.7 | 2.6 | 2.2 | 2.2 | 4.0 | 5.9 | 6.9 | |||
| Average receipt per | |||||||||||
| tourist (In US$) | … | 327 | 422 | 417 | 465 | 666 | 950 | 701 | |||
Based on arrivals at Phnom Penh airport only.
Private sector development
22. Private sector development is crucial for promoting sustained growth. The main difficulties faced by businesses in Cambodia, based on a recent World Bank assessment, are as follows.
High risk. The legal system is underdeveloped and lacks public trust. The wide perception of corruption in the judiciary reflects the absence of rule of law needed to protect property rights. Land titles are not widespread and often lack clarity, making it difficult to securitize land for credit. Regulatory frameworks for road transportation are underdeveloped, resulting in deterioration of road infrastructure. The financial sector is weak and credit is costly. Interest rate spreads are about 13 percent, with loans typically rolled over every 3-6 months. Secured property rights are lacking. As a result, capital- and knowledge-intensive businesses with long payback periods are penalized in favor of trading, retail and garment businesses, and tourism, which incur low capital costs, enjoy high margins, or benefit from unique cultural assets.
High operating costs. Margins are eroded by high official and unofficial administrative costs, inefficient financial intermediation, high cost of inland transport, ports, utilities, and service delays. There is duplication in the roles of various government entities.
Lack of basic infrastructure. The poor quality of the roads raises significantly transportation costs. The lack of basic infrastructure and financial services in rural areas add to the difficulties faced by rural businesses, raising costs further and limiting market opportunities. Cambodia’s road network, and access to electricity and piped water is lagging compared to neighboring Lao P.D.R. with similar GDP per capita. Government funding of public investment is low and large shares of infrastructure investment are unfunded.
Foreign direct investment (FDI). FDI has generally been related to trade arrangements on garment exports. FDI declined in recent years to around 4 percent of GDP owing to a slowdown in key export markets, competition from Vietnam and China for FDI, and the uncompetitive costs of doing business in Cambodia. Factors which have affected Cambodia’s competitiveness include infrastructure, costly labor and material inputs, unofficial costs at the ports and in overland transportation. Wages in the garment sector are also higher than in competitor countries.
Export diversification. The increasing free-trade environment could entail a loss of market share for garment and footwear products. Ongoing trade liberalization and improvements in regional transportation linkages are expected to provide new opportunities for: (i) exportable products based on local resources (e.g., agrobusiness); and (ii) integration in regional supply chains in products for which Cambodia maintains a cost advantage.
Infrastructure
23. Transportation infrastructure has been severely damaged as a result of almost two decades of war. The major national roads and some secondary roads have been rebuilt or rehabilitated with foreign support during 1992-96. However, the quality of the rural road network remains poor. The lack of maintenance due to budgetary constraints and excessive truck loads have contributed to the deterioration of the strategic roads. The international airports of Phnom Penh and Siem Reap operated by foreign concessions are crucial for promoting tourism and economic development. The recently upgraded Phnom Penh airport has now a one million annual passenger capacity. Cambodia’s railway system is outdated and in need of extensive rehabilitation. The amount of financing required for that purpose, however, far exceeds the country’s budgetary capacity. Cambodia is endowed with two major port facilities which have been upgraded with substantial donor support. However, these ports may face increasing competition from Vietnam in the period ahead, after completion of the expressway linking Vietnam and Thailand. Progress has been made with donor support in improving water and electricity supply in urban areas, but much remains to be done in rural areas.
C. Prices, Income, and Labor Market
24. Inflation has been gradually stabilized as a result of the government reform programs, after experiencing triple digit inflation in several years during 1989-93. Cambodia, however, experienced an increase in inflation during the 1997-98 political crisis, reflecting a temporary relaxation of fiscal discipline. Cambodia’s successful performance in controlling inflation since 1999 mirrors renewed fiscal restraint, as no bank financing of the budget was used during that period. This has been instrumental in maintaining the riel broadly stable, both against the US dollar and in real effective terms. During 1994-2002, the riel-denominated annual average inflation rate, as measured by the CPI in Phnom Penh was about 6 percent, while the dollar-denominated inflation rate was about 1 percent. The riel-denominated inflation rate has been brought down further to 3 percent during 1999-2002, reflecting continued fiscal restraint under the government’s reform program. Underlying inflation in the medium term is expected to remain below 5 percent annually, provided that sound macroeconomic management remains in place.
Cambodia: Inflation Indicators, 1998-2002
(Percent change 1/; unless otherwise indicated)
Refers to the new CPI for Phnom Penh (July-December 2000 = 100).
Changes in the weights between the new CPI for Phnom Penh (July-December 2000 = 100) and the previous CPI (July-September 1994).
Cambodia: Inflation Indicators, 1998-2002
(Percent change 1/; unless otherwise indicated)
| Items | Weights | 1998 | 1999 | 2000 | 2001 | 2002 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in percent of total) 1/ | (change in weights) 2/ | |||||||||
| Overall CPI 1/ | 100.0 | 0.0 | ||||||||
| Period average | ||||||||||
| In US$ terms | −10.4 | 2.9 | −4.2 | −0.1 | 3.3 | |||||
| In riel terms | 14.8 | 4.0 | −0.8 | 0.2 | 3.3 | |||||
| End-period | ||||||||||
| In US$ terms | 3.5 | −0.4 | −4.2 | 1.0 | 2.4 | |||||
| In riel terms, of which: | 13.3 | −0.5 | −0.8 | 0.7 | 3.7 | |||||
| Food, beverages and tobacco | 42.7 | −7.1 | 20.6 | −0.2 | −3.7 | −2.3 | 3.5 | |||
| Clothing and footwear | 2.2 | −1.5 | 6.3 | −2.5 | 12.0 | −8.1 | −4.7 | |||
| Housing and utilities | 33.3 | 9.4 | 5.6 | 0.1 | 2.8 | 4.0 | 6.8 | |||
| House furnishing and household operations | 0.7 | −1.3 | 18.5 | 14.4 | −1.1 | −2.6 | −1.4 | |||
| Medical care | 4.0 | −1.7 | 8.6 | −12.1 | 0.8 | 6.1 | −1.3 | |||
| Transport and | ||||||||||
| communications | 8.7 | −0.3 | 4.4 | 3.2 | 4.8 | −6.5 | 3.9 | |||
| Recreation and education | 6.2 | 3.0 | 7.6 | −6.3 | −0.7 | 12.1 | −3.3 | |||
| Personal care and effects | 2.2 | −0.4 | 7.6 | −1.7 | 1.4 | 3.4 | −0.3 | |||
| Exchange rate (riel/US$; percent change) | ||||||||||
| Period average | 28.1 | 1.1 | 1.2 | 1.7 | 0.0 | |||||
| End-period | 9.5 | −0.1 | 3.6 | −0.3 | 1.3 | |||||
Refers to the new CPI for Phnom Penh (July-December 2000 = 100).
Changes in the weights between the new CPI for Phnom Penh (July-December 2000 = 100) and the previous CPI (July-September 1994).
Cambodia: Inflation Indicators, 1998-2002
(Percent change 1/; unless otherwise indicated)
| Items | Weights | 1998 | 1999 | 2000 | 2001 | 2002 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in percent of total) 1/ | (change in weights) 2/ | |||||||||
| Overall CPI 1/ | 100.0 | 0.0 | ||||||||
| Period average | ||||||||||
| In US$ terms | −10.4 | 2.9 | −4.2 | −0.1 | 3.3 | |||||
| In riel terms | 14.8 | 4.0 | −0.8 | 0.2 | 3.3 | |||||
| End-period | ||||||||||
| In US$ terms | 3.5 | −0.4 | −4.2 | 1.0 | 2.4 | |||||
| In riel terms, of which: | 13.3 | −0.5 | −0.8 | 0.7 | 3.7 | |||||
| Food, beverages and tobacco | 42.7 | −7.1 | 20.6 | −0.2 | −3.7 | −2.3 | 3.5 | |||
| Clothing and footwear | 2.2 | −1.5 | 6.3 | −2.5 | 12.0 | −8.1 | −4.7 | |||
| Housing and utilities | 33.3 | 9.4 | 5.6 | 0.1 | 2.8 | 4.0 | 6.8 | |||
| House furnishing and household operations | 0.7 | −1.3 | 18.5 | 14.4 | −1.1 | −2.6 | −1.4 | |||
| Medical care | 4.0 | −1.7 | 8.6 | −12.1 | 0.8 | 6.1 | −1.3 | |||
| Transport and | ||||||||||
| communications | 8.7 | −0.3 | 4.4 | 3.2 | 4.8 | −6.5 | 3.9 | |||
| Recreation and education | 6.2 | 3.0 | 7.6 | −6.3 | −0.7 | 12.1 | −3.3 | |||
| Personal care and effects | 2.2 | −0.4 | 7.6 | −1.7 | 1.4 | 3.4 | −0.3 | |||
| Exchange rate (riel/US$; percent change) | ||||||||||
| Period average | 28.1 | 1.1 | 1.2 | 1.7 | 0.0 | |||||
| End-period | 9.5 | −0.1 | 3.6 | −0.3 | 1.3 | |||||
Refers to the new CPI for Phnom Penh (July-December 2000 = 100).
Changes in the weights between the new CPI for Phnom Penh (July-December 2000 = 100) and the previous CPI (July-September 1994).
25. The National Institute of Statistics (NIS) has published new monthly CPI series for Phnom Penh (July-December 2000 = 100) since January 2002, replacing the old CPI series (July-September 1994 = 100). The new CPI reflects changes in item expenditure weights, additional items, and product substitution. The CPI weights were derived from the 1999 Cambodian Socio-Economic Survey. The new CPI shows the largest increases in the weights for “Housing and Utilities” and “Recreation and Education”, 9.4 and 3.0 percent, respectively. The weight allocated to the rental value of owner-occupied housing within “Housing and Utilities” has been increased significantly, from 18.5 to 27.0 percent. The total weight of all the other groups has decreased, with significant downward revisions for “Food, Beverages and Tobacco.” (-7.1 percent). The new CPI basket for Phnom Penh has also been expanded with the addition of 21 new items. The overall impact of the various changes noted above is a 0.66 percent increase in the 2000 CPI between December 2000 and December 2001, compared to a corresponding 0.62 percent decrease in the 1994 CPI. The NIS has also recently released a new quarterly “Urban CPI,” based on a basket of expenditure items for Phnom Penh and five provincial cities. Preliminary results for June 2001-June 2002 show higher inflation in Phnom Penh than in the provincial centers.
26. Information on Income is very scanty as earnings data are sporadically available only for selected categories of wage earners. Cambodia’s GDP per capita (US$ 241 in 1999) is among the lowest among low income and East Asian countries, ranking 186th among 206 countries, according to the 2001 World Development Report. Household incomes are very low, especially in rural areas (about $40 monthly per rural household). Private sector minimum wages in 2001 were highest in the manufacturing sector ($45 and $73 monthly in the garment and tobacco industry, respectively), representing about 2 to 4 times average public sector wages (about $20 per month in 2001). The 35 percent increase in civil service wages granted in 2002 raised the average monthly civil service wage to $28 but did not significantly reduce the gap with private sector minimum wages.
27. Cambodia’s labor force is growing rapidly, primarily mirroring a fast growing population (on average 2.9 percent annually in the last two decades), insufficient economic growth in rural areas, and low skills and literacy. The labor force was estimated at 6.4 million (49 percent of total population) under the second nationwide Labor Force Survey (LFS) conducted in November 2001. While about 150,000 to 175,000 people have joined the labor force annually in recent years, the annual pace is projected to reach about 200,000 by 2010. Moreover, Cambodia’s population is relatively young, with more than half of it under 20 years of age. The challenge will be to translate this significant labor force growth into high economic growth that leads to job creation in rural areas, where poverty is predominant. Cambodia’s labor market is dominated by agriculture, with the sector accounting for 67 percent of employment at the time of the 2001 LFS. Employment in the formal sector remains limited to a few foreign-owned industries (i.e., garments, foodstuffs and tobacco) hotels and restaurants, and public administration. Informal sector employment is predominantly in agriculture, the retail and wholesale industry, and transport. Unemployment data are not relevant in Cambodia, as evidenced by the low unemployment rates measured either through the 1998 Census or the 2001 LFS (overall unemployment rate of 5 and 1.8 percent, respectively). On the other hand, underemployment is high (38 percent under the 2001 LFS), especially in the agricultural sector. Inward and outward labor migration have increasingly affected labor market developments, reflecting lack of work opportunities and high poverty levels in rural areas.
28. The Labor Law provides for a generally adequate legal framework for ensuring smooth labor relations. However, weak labor arbitration arrangements and corruption in the arbitration process have given rise to protracted disputes, especially in the garment industry, between factory owners and trade unions. Labor relations in the garment industry have been monitored closely by the International Labor Office (ILO), especially since 1999 when the US government made the allocation of a 14 percent additional quota contingent upon the garment industry complying with internationally recognized core labor standards. Core labor standards refer to conventions on: (i) freedom of association; (ii) freedom from discrimination; (iii) freedom from forced labor; and (iv) a prohibition on child labor. The core issue in labor relations in Cambodia is freedom of association and particularly the extent to which workers are able to join trade unions or participate in their activities.
D. Conclusion
29. Economic growth during the mid-1990s was high and largely based on agriculture, including forestry overexploitation. Cambodia’s economic recovery accelerated in the aftermath of renewed political stability in late 1998, owing to fiscal and monetary discipline and the gradual implementation of a broad reform agenda supported by the international community. The country’s growth pattern, however, has been deeply altered with the rapid development of the garment industry since 1997 and the deterioration of agricultural sector performance in recent years, resulting from recurring flooding and droughts as well as efforts to restrain illegal logging to preserve a valuable long-term source of growth. Although economic growth since 1999 has been generally robust, it has not yet significantly reduced poverty. In the period ahead, Cambodia remains faced with the challenge of setting the ground for inclusive growth, especially through improved education and health care services, while maintaining economic growth rates exceeding 6 percent annually. Low productivity in agriculture and competitiveness concerns in the garment industry call for the need for further sustained reforms aimed at broadening the resource base, especially in view of the phasing out of the garment quota in 2005. Maintaining political and social stability will also be crucial for keeping the confidence of foreign investors.