1

CambodiasEconomy
USDepartmentof State
AmbassadorialonCambodia
DACORBaconHouse,Washington,DC
September15,2008
SophalEar,Ph.D.
Acknowledgements: This presentation is adapted from a Harvard KSG
workshop held earlier this year on the Political Economy of "Binding
Constraints to Growth" Cambodia Pilot for which I served as an External
Panelist/Resource Person.
September15,2008 Cambodia'sEconomy 2
thestructuraltransformationofCambodia
0.0
1.0
2.0
3.0
Populationgrowth
1993 1998 2006
0
10
20
30
40
Population014(%)
1993 1998 2006
0
5
10
15
20
Urbanpop.(%)
1993 1998 2006
0
100
200
300
400
500
GDPpercapita(US$)
1993 1998 2006
0
10
20
30
40
50
Povertyincidence(%)
1994 2004
0
10
20
30
40
Inequality(Giniofrealpercapita
consumption)
1994 2004
2
September15,2008 Cambodia'sEconomy 3
thestructuraltransformationofCambodia,
cont.
0
2
4
6
8
FDI(%GDP)
1993 1998 2005
0
5
10
15
20
Dom.Credittopriv.
sector(%GDP)
M2/GDP(%)
1993 1998 2006
0
20
40
60
80
100
Aidpercapita
(currentUS$)
Aid(%ofgross
capitalformation)
1993 1998 2005
0
50
100
150
Trade(%GDP)
1993 1998 2005
0
10
20
30
40
50
GDPagri GDP
industry
GDP
services
1993 1998 2005
0
20
40
60
80
Empagri Emp
industry
Emp
services
1993 1998 2006
September15,2008 Cambodia'sEconomy 4
reachingnewheights?
310
550
1,513
725
0
250
500
750
1000
1250
1500
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
2
0
2
0
Income per
capita (2007 $)
3
September15,2008 Cambodia'sEconomy 5
reachingnewheights?
1
wherearethesourcesof
growth?
2
wherearetheconstraints?
3
howtoalleviatethese
constraints?
September15,2008 Cambodia'sEconomy 6
1.wherearethesourcesofgrowth?
FACTS
Narrowbaseofgrowth
Exportdriven
Garmentandtourismniches
GoodlocationinSouthEastAsia
andopeneconomy
Keyroleoftherural
economyandagriculture
Possiblenewsourcesof
growthinoil,gas,and
mining
QUESTIONS
Howtodiversify?What
shouldbetheapproach?
Canpriorityproductsbe
identified?
Whatwill/shouldbethe
roleofagriculture?
Whataretheemployment
implicationsofvarious
sectoralscenarios?
1
4
September15,2008 Cambodia'sEconomy 7
growingwithfourfragileengines
13
28
20
13
26
0
25
50
75
100
1998-
2006
Other
Hotel /
Transports
Constructi on /
Real Estate
Garment
Crops
Contributiontogrowth(%)
1
Crops:rainfed;mainlyrice
Garments:main(only?)export;mainlytoUS
market;slowgrowthin2007withcompetitionfrom
Vietnam;furthercompetition(inc.China)inthe
future?
Realestate/construction:veryrapidgrowth,
especiallyinPhnomPenh;talksofabubble
Tourism:rapidgrowth.InitiallymainlytoSiemReap
andAngkor graduallytoPhnomPenhand
Sihanoukville,withfurtherpotential
September15,2008 Cambodia'sEconomy 8
19priorityproducts
Silk,livestock,cashewnuts,corn,beer,
webbasedservices,transportservices
Low
Fishery,rice,fruitsandvegetables,wood
products,lightmanufacturing,labor
services,soybeans
Medium
Garments,tourism,footwear,rubber,
cassava
High
Products Exportpotential
1
5
September15,2008 Cambodia'sEconomy 9
extractiveindustriesmakingitablessing
instead ofacurse
Oil,gas:
Someexploration(offshore),
butnoprovenreserveyet
Hypotheticalscenario(IMF)of
revenuesonstreamin2011;
netpresentvalueofoilwealth
at$15b(115%of2011GDP);
revenuestreammaxat4%of
GDPin2021
Mining:
Bauxite,iron,gold
Justinitialexploration
Maximizerevenues:
Legalandfiscalregime
Goodinvestors
Manageassets,volatility
andmacro
Otherimpact:
Economic(downstream
industry?)
Environmental(esp.artisanal
mining)
Social,safety,etc.
1
September15,2008 Cambodia'sEconomy 10
creating200250,000jobsperyear
0
50
100
150
200
250
300
350
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Agri culture Industry Servi ces
1,180
6,075
4,107
1,391
5,570
3,897
0
2,000
4,000
6,000
Agricul ture Industry Services
1998 2005
Annualjobcreation(000jobs)
Valueaddedperworker(constantriels)
1
6
September15,2008 Cambodia'sEconomy 11
2.whataretheconstraints?
FACTS
Increasinginvestment
especiallyinveryrecent
years,butfocusedonreal
estate(howmanyhighrises
doesPhnomPenhneed?)
Weakproductivity,limited
diversification
Ifonelooks,constraints
appeareverywhere,but
whichreallymatter?
QUESTIONS
Howtoidentify
constraints?Aresome
ofthemsectorspecific?
Whatarethestylized
factsofprivatesector
developmentthatare
symptomsof
constraints?Where
isntmoneygoing?
2
September15,2008 Cambodia'sEconomy 12
productivitylaggingbehind
500
1,000
1,500
2,000
2,500
3,000
3,500
1960 1970 1980 1990 2000
Cambodia SoutheastAsia
2
Yieldperhectare(kg/Ha)forcereals
2.1
-0.2
-0.4
2.4
-1.2
-0.8
-1.5
-0.5
0.5
1.5
2.5
Agriculture Industry Services
1993-1998 1998-2005
Growthofvalueaddedperworker(%)
7
September15,2008 Cambodia'sEconomy 13
goodenoughgovernanceingarments?
Afewfundamentals:politicalstabilityandsignalingof
commitmenttogoodbusinessenvironment;creatingrentsto
payforentry
Initialrents:quotasinUS(linkedtolaborstandards)
plustaxincentives
Thenrentreplacedbygoodindustrycoordination
Butenoughcompetition?Nowcompetitionfrom
Vietnamand,soon,China;plusrecentreal
appreciation
Garment
Politicalstabilityincreasedafter1998
Inflationwentdownatthattime;thenfirstLDCto
joinWTO(2004):signalcredibleshiftinpoliciesand
crediblemacromanagement
Accelerationof
growthinearly
2000
2
September15,2008 Cambodia'sEconomy 14
3.howtoalleviateconstraints?
FACTS
Goodmacromanagement
sofar
Limitedfiscalspace large
needs
Growthis andwill bring
anumberofissuesto
manage(equity;
environment;cities;etc.)
QUESTIONS
Howtoaddressupcoming
macrochallenges(inc.from
oil)?
Howtoincreasefiscalspace
andbestuseit?(inc.inthe
contextofoilproduction)
Complementarypoliciesto
managegrowth?
3
8
September15,2008 Cambodia'sEconomy 15
stableexchangerate
70
80
90
100
110
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
Nominal Real
Effectiveexchangeratewithkeytradepartners
(100=2000;increase=depreciation)
3
September15,2008 Cambodia'sEconomy 16
inflationnowpickingup
-10
-5
0
5
10
15
20
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
Infl ati on rate (al l i tems) Infl ati on rate (food, beverages, tobacco)
CPIgrowthrate(YoY,%)
9
September15,2008 Cambodia'sEconomy 17
creatingfiscalspaceinadifficultpolitical
economyenvironment
Limitedfiscalspace:
Lowrevenues(excludinggrants)/GDP(9.8%onlyin2006),duetoapolitical
economymixofunofficialpaymentsandgeneroustaxincentives
Someroomforexpenditurereallocation
Despitegenerousaid(7.6%ofGrossNationalIncomein2006,althoughmainly
offbudget,arelativedeclinefrompreviousyearswhichfrom19932006
averagednearly11%)
3
Cambodias Aid, Tax, and Domestic Revenues 2002-2006
3 3 N/A N/A N/A CPIAefficiencyofrevenuemobilizationrating(1=lowto6=high)
9.81 9.68 9.86 9.41 10.31 Revenue,excludinggrants(%ofGDP)
8.19 7.91 8.15 7.55 8.19 Taxrevenue(%ofGDP)
37.26 38.74 35.22 38.13 36.52 Aidpercapita(currentUS$)
7.59 8.99 9.49 11.50 11.79 Aid(%ofGNI)
84.68 113.18 110.67 118.66 120.35 Aid(%ofcentralgovernmentexpenditures)
528,990,00
0
540,680,00
0
483,190,00
0
514,310,00
0
484,250,00
0
Officialdevelopmentassistanceandofficialaid(currentUS$)
2006 2005 2004 2003 2002
Source: WDI Online. Accessed: 25 August 2008.
September15,2008 Cambodia'sEconomy 18
insum
Cambodiahasenjoyedveryrapidgrowth
overthelastdecade,butonanarrow
productionbaseoffourenginesand
despiteinnumerableconstraints
Somefundamentalsareinplacetosustain
rapidgrowth macromanagement,
opennessinadynamicregion,etc
althoughthesemaynotbeenough
Sustainingrapidgrowthwillalsobringa
numberofchallenges:increasedinequality,
environmentaldegradation(atleastinthe
shortrun),etc.
10
September15,2008 Cambodia'sEconomy 19
Additionalslides
Backgrounddataonvariouspotentialconstraintsto
growth
September15,2008 Cambodia'sEconomy 20
weakgovernance
11
September15,2008 Cambodia'sEconomy 21
infrastructurecosts
0.04
0.05
0.06
0.07 0.07
0.09
0.18
0.00
0.05
0.10
0.15
0.20
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US$/KWh
250
1,500
180
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1,000
1,250
1,500
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h
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t
US$000
Electricity costs
(from grid)
Additional capital
costs (plus
operation; parts;
training;
maintenance; etc.)
September15,2008 Cambodia'sEconomy 22
334%
117%
10%
140%
132%
39%
236%
19%
0% 100% 200% 300%
Price basket for Internet (US$ per month)
Price basket for mobile (US$ per month)
Roads, paved (% of total roads)
Pump price for diesel fuel (US$ per liter)
Pump price for super gasoline (US$ per liter)
Road density (kmof road per 100 sq. kmof land area)
Real interest rates (%)
School enrollment, tertiary (% gross)
Cambodia as % of
10 comparators
12
September15,2008 Cambodia'sEconomy 23
connectingtocompete
4.2
3.5
3.3
3.1
2.9
2.6
2.5 2.5
2.3
1.2
0
1
2
3
4
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2007LogisticsPerformanceIndex
September15,2008 Cambodia'sEconomy 24
sustainingdiscoveries
64% 62%
58%
57%
56% 55%
51%
43%
39%
37%
35%
0%
20%
40%
60%
C
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i
n
a
J
a
p
a
n
K
o
r
e
a
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G
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b
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C
a
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r
o
o
n
After1year After5years
SurvivalRateofNewExportsAfter1or5Years
13
September15,2008 Cambodia'sEconomy 25
sizeandproductivityinagriculture
19
27
22
20
13
0
5
10
15
20
25
30
Landless 0.0 to 0.5
ha
0.5 to 1.0
ha
1.0 to 2.0
ha
2 ha and
more
Distributionofhouseholdsbylandholding(%)
September15,2008 Cambodia'sEconomy 26
investment
Cambodia
0
10
20
30
40
50
-5 0 5 10 15 20
Growth (%, 04-06)
Investment /
GDP (%, 04-
05)
0%
5%
10%
15%
20%
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
Li vestock Durabl e Equi pment Constructi on
2
Investment/GDP
14
September15,2008 Cambodia'sEconomy 27
corruption&governance
Licenses
Cost finance
Transport
Tax rates
Tax admin Legal system
Customs Access finance
Labor reg.
Land
Telecom
Skills
Electricity
Macro instability
Crime, Theft
Regulatory
uncertainty
Anti-competitive /
informal pract.
Corruption
0
10
20
30
40
50
60
0 10 20 30 40 50 60
2003/04
2
0
0
7
/
0
8
Sources: Investment climate surveys in Cambodia
2
Major obstacles to business, as reported by firms established in Cambodia