Industrial-Led Economic Development of Cambodia: Implications for Low-Income Developing Countries.

• Author: Mah, Jai S.

1. Introduction

   Between 1975 and 1989, Cambodia, whose economy was closed to foreign direct investment (FDI) and foreign markets, was under a Marxist regime. The national economy was dominated by agriculture, with few manufacturing-related activities. Meanwhile, under the Khmer Rouge regime, human capital and physical infrastructure were destroyed. Since the transition period of 1989-93, Cambodia has pursued a market economy mainly based on exporting to foreign markets and FDI inflows (Chhair and Ung 2013; OECD 2018). Its annual average real GDP growth rate reached 7.5 per cent in the 1986-2019 period (UNCTAD 2020). Reflecting rapid economic growth, the country transitioned from a low-income developing country to a lower-middle-income developing economy status in 2016 (OECD 2018).

   Although Cambodia still relies heavily on agriculture, the share of the manufacturing sector has continued to increase rapidly since the 1990s. Manufacturing growth has been led by the labour-intensive garment industry, in which the country enjoys a comparative advantage. Simultaneously, the Cambodian government has pursued a broad-ranged industrial policy focusing on investment and resource allocation decisions by private companies and on the industrial structure of the economy (Stiglitz, Lin, and Monga 2013; Dolfsma and Mamica 2020). The state policy underscored export promotion, export product diversification, import liberalization and FDI utilization. As a result, the nation's trade dependence ratio continued to rise. Moreover, the policymakers tried to attract FDI very actively by constructing an investor-friendly atmosphere. In other words, active participation in the globalization wave has contributed to the rapid industrialization and economic growth of Cambodia over the past quarter century.

   This study first investigates the role of industrial policy and the development of the manufacturing sector in fostering Cambodia's economic growth and then attempts to derive relevant policy implications for low-income developing countries. The remainder of this paper is structured as follows. The next section presents an overview of the economic development experience of Cambodia. The third section offers insights into the country's evolving industrial structure and its role in economic development. The subsequent section explains how industrial policy affects international trade, FDI and human capital, while the fifth section highlights policy implications for other economies. The final section concludes.

2. Economic Development of Cambodia: A Brief Overview

   After the fall of the Khmer Rouge regime (1975-79), Cambodia began undertaking market-based reforms in the late 1980s (WTO 2011). (1) The First Five-Year Programme of Socioeconomic Restoration and Development covering the 1986-90 period prioritized the agricultural sector, infrastructure and reconstruction. It was followed by the 1994 National Programme to Rehabilitate and Develop Cambodia, which was the first full-fledged comprehensive national programme that provided a long-term development vision (ADB 2014).

   Privatization and trade liberalization were the main goals in the 1990s. Cambodia acceded to the WTO in 2004. As a result of the privatization efforts following the WTO accession, only a few state-owned enterprises (SOEs) have emerged in Cambodia (WTO 2011, 2018). The country recorded particularly rapid economic growth in 1998-2008, when its annual average real GDP growth rate reached close to 10 per cent, the highest among low-income countries in Asia. Although the growth slowed down during the 2008 Global Financial Crisis, it has recovered since then. As shown in Table 1, while GDP per capita was as low as US$189 in 1990, it jumped to US$1,625 in 2019, reflecting the rapid development over the last three decades. In the 2010s, the annual average real GDP growth rate topped 7 per cent. By 2015, the

   national economy relied heavily on the garment industry, tourism, construction and rice production (Royal Government of Cambodia 2015).

   Swift economic growth has also been accompanied by the strengthening of national infrastructure. For instance, according to the World Bank's Logistics Performance Index, Cambodia's logistics ranking improved remarkably from the 129th position in 2010 to the ninety-eighth spot in 2018. Meanwhile, the proportion of electricity imported from neighbouring countries fell from 63.1 per cent of the total consumption in 2011 to 18.6 per cent in 2017. The number of mobile phone users increased from 2.7 million in 2012 to 10 million in 2017. Likewise, health conditions have also improved. Specifically, life expectancy at birth has risen from 56.7 years in 1998 to 70.6 years in 2018 (Royal Government of Cambodia 2018).

   Since the late 1980s, Cambodia's trade dependence ratio has risen continuously, reaching 209.9 per cent in 2019. The export value of goods and services rose sharply from US$0.3 billion in 1992 to US$21.2 billion in 2019. During the same interval, import value jumped from US$0.5 billion to US$25.4 billion. Although exports have increased steeply since the 1990s, they have been overshadowed by escalating imports. Consequently, Cambodia has continued to experience a chronic current account deficit, amounting to -US$4.2 billion in 2019 (UNCTAD 2021).

   It is important to note that emigrant workers' remittances have contributed to offsetting this deficit to some extent. In 2013, emigrants from the country totalled 1.2 million, or 7.3 per cent of the population. The inward flow of remittances rose from US$121 million in 2000 to US$304 million in 2014. Moreover, the average amount of remittances from external migrants reached 20.1 per cent of the median disposable household income in 2010 (ADB 2015).

   In the early 1990s, national exports were dominated by rubber and wood products (ADB 2014). Since then, the proportion of manufactured goods in total exports has grown considerably, reaching 96.3 per cent in 2005 before settling at around 91.4 per cent in 2016. Although the share of garments in total exports was a mere 3 per cent in 1990, it rose quickly during the 1990s, rising to 79.8 per cent in 2010 and then reaching 66.1 per cent in 2016. This shows that Cambodia's goods exports have been led largely by garment exports. The simultaneous increase in exports of machinery and transport equipment from 0.5 per cent in 2005 to 8.3 per cent in 2016 indicates the gradual development of the value-added heavy industry in the country (WTO 2011, 2018; ADB 2014).

   In 2018, garment exports amounted to US$7.9 billion, forming 62 per cent of total goods exports, and this was followed by exports of footwear, at US$1.0 billion. In other words, the majority of Cambodia's goods exports are made up of labour-intensive, light-manufactured products. In the same year, the export value of electrical/electronic equipment and vehicles reached US$0.5 billion and US$0.4 billion, respectively. Plastic exports equalled US$0.2 billion, whereas machinery, iron/steel and aluminium exports were worth US$0.2 billion (Trading Economics 2020). Products belonging to the IT and heavy and chemical industries shared about 16 per cent of the total goods exports in 2018. It is interesting to note that the value of bicycle exports increased from US$44 million in 2006 to US$0.4 billion in 2019 (ADB 2014; Phnom Penh Post, 4 August 2020). Exports of certain primary products increased in the late 2010s. For instance, since the adoption of the national rice policy in 2009, exports of the grain have increased from close to 600,000 tonnes in the late 2010s to around 800,000 tonnes in 2020 (Khmer Times, 4 November 2020). Gold exports reached US$2.2 billion in the first eight months of 2020 (Khmer Times, 4 November 2020).

   In 2016, Cambodia's largest export destination was the EU (39.9 per cent of total exports), followed by the US (21.3 per cent) and then Japan (8.2 per cent). The duty-free imports into the EU under the Everything But Arms (EBA) scheme may explain this trend (WTO 2018). About 90 per cent of Cambodia's exports in 2010-15 benefited from the Generalized System of Preferences (GSP) that provide preferential treatment to products exported by developing countries (OECD 2018).

   In the 2010s, the largest single import product was textile, making up between 33 and 38 per cent of goods imports in 2012-16. Meanwhile, in 2016, transport equipment, electrical and non-electrical machines shared 9.0 per cent, 5.6 per cent and 6.9 per cent of goods imports, respectively (WTO 2018).

   With the expansion of international trade, Cambodia has also benefited from the increasing FDI inflows. For instance, the bilateral trade agreement with the US signed...