Is Cambodia’s Economic Prosperity Over?

Cranes building Phnom Penh’s rapidly rising skyline attest to Cambodia’s economic success as well as to China’s commitment to investing in the kingdom’s infrastructure. Cambodia has been highly successful in attracting foreign direct investment, creating employment and alleviating poverty for millions. 

The outstanding performance of its economy has been widely acknowledged: the Asian Development Bank calls Cambodia the “new tiger economy” and the World Bank announced Cambodia’s transition from a low-income to a lower-middle-income country. The widely held expectation is that Cambodia will achieve upper-middle-income status by 2030 if recent growth rates are sustained, East Asia Forum reported. 

But Cambodia is still among the least developed countries. For this reason, Cambodia is likely to retain the preferential trade agreements and donor payments that the country has enjoyed for decades. Economic prosperity is set to advance—unless politics get in the way. 

Cambodia’s economic rise is in stark contrast to the political chaos that reached a climax in November 2017 with the dissolution of the Cambodia National Rescue Party—the country’s only major opposition party—and the detention of its leader, Kem Sokha. Prime Minister Hun Sen has also threatened to close the Cambodian Center for Human Rights, which was founded by the detained opposition leader. 

The moves have been widely condemned as marking Cambodia’s shift to a one-party dictatorship, and many western countries have threatened sanctions. Member states of the European Union announced restrictions on rice imports from Cambodia, while Canada and Australia encouraged Cambodia to reinstate proper democratic processes.

  EU, US Sanctions

Perhaps the strongest response came from the United States, which Hun Sen has accused of supporting the arrested opposition leader’s efforts to conspire against the Cambodian government. The US immediately cancelled the riel 1.8 million ($2.3 million) in funding it had pledged for the 2018 Cambodian general elections and it announced visa sanctions against Cambodian officials who were “undermining democracy”. 

Since the 1991 Paris Accords, the US has spent billions supporting the democratic process in Cambodia in order to restore and preserve peace after two decades of civil war and Khmer Rouge atrocities. The recent political developments are widely viewed as a collapse of the democratization process—a view that is shared by international rights organizations such as Global Witness and Human Rights Watch. Further recommended sanctions include asset freezes, travel bans on senior officials, trade restrictions and the suspension of all technical assistance for elections. 

The Cambodian government and the ruling party have been bemused by western criticism. The prime minister welcomed the cutting of US aid for the elections, pointing out that this would put an end to NGO meddling in Cambodian affairs. After all, western aid has always been conditional on the government maintaining proper democratic processes and institutions. Alluding to the robust performance of the Cambodian economy, a spokesman of the ruling party dismissed concerns, saying “everything is better now than it was before”. 

Will Cambodia’s political fiascos put an end to its economic rise? Cambodian unions fear foreign sanctions will involve a cancellation of preferential tariff rates. In a joint statement, the four major unions in the country appealed to foreign embassies and buyers to treat their industries as separate from politics. 

  Beijing’s Support

As one of China’s most favored nations, Cambodia not only receives economic investment and aid with “no strings attached” but also receives Beijing’s political support. China has explicitly expressed its support for the Cambodian government and Hun Sen, who is one of Beijing’s most important allies in Southeast Asia.

The Cambodian business community is championing close ties to the government. It views an election victory for the ruling Cambodian People’s Party as the most desirable outcome since any other would be detrimental to established business interests. 

While the political drama unfolds, Cambodian people go about business as usual and politics does not seem to be the first thing on their minds. 

  2017 GDP Growth at 6.9%

After it graduated from least developed country status in July 2016, Cambodia’s economy has remained healthy with a GDP growth rate of 6.9% in 2017. This was driven by the recovering tourism sector, the ongoing construction boom and the gradual emergence of non-textile exports, CNA reported.

During the first 10 months of 2017, Cambodia received 4.3 million international tourists, up 10.4% compared with the same period in 2016. This was partly due to newly established direct regional flights as well as government initiatives to boost arrivals.

The construction sector continues to grow robustly. Investment into the sector during the first ten months of the year reached $6.26 billion, a 27% increase over the same period in 2016. 

Exports of machinery and auto parts picked up. The number of factories dedicated to electrical machinery and auto parts increased from 46 in 2012 (5.1% of manufacturing) to 121 in 2017 (7.1% of manufacturing).

Growth in clothing and other textile exports decelerated to 5.4% in the first half of 2017, compared with the 8.4% growth rate in 2016. Textile exports have also eased in volume terms to a growth rate of 3.6% in 2017, which is down from 2016’s figure of 12.3%.

The slowdown in textile exports reflects a decrease in productivity, an increasingly competitive global market, the high cost of transportation and energy as well as rising labor costs.

The minimum wage for the garment and footwear sector is $153 a month and will increase to $170 a month in 2018. This will make the minimum wage in Cambodia higher than that of other countries with large garment industries (such as Bangladesh and Myanmar).