By Heng Dyna
Cambodia enjoyed the rapid growth between 2000-2007 with an average annual rate of around 9%. However, the collapse of its growth in 2008-2009 due to global financial crises clearly highlighted its economic fragility: narrow economic base, proneness to asset bubbles, weak financial system, and limited policy instruments available to the Royal Government of Cambodia. This essay attempts to point out Cambodia’s economic vulnerability to adverse economic shocks and highlights some policy implications.
In retrospect, Cambodia’s economic growth has been marked by volatility due to narrow economic base, high openness (trade and finance), occasionally political uncertainty, and lacks of defensive economic policies. In this regard, three major challenges of Cambodia’s economic development deserve attention.
First, Cambodia’s integration and openness to global economy has promoted growth, but also exposed the country to quick boom-bust cycle, and output volatility. On the one hand, Cambodia could enjoy foreign investment, export and import the myriads of products, and connect Cambodia’s to the world of information, knowledge, and technology. On the other hand, the influx of capital inflows or transmission of economic shocks could easily drive asset price bubble or drag Cambodia‘s growth down, respectively.
Second, Cambodia faces a big challenge in translating and directing capital inflows (i.e. ODA, remittance, FDI, income from resource boom) into broad-based development in physical infrastructure, education, and health care, all of which are the very foundation of long-term development. Without government’s strong facilitating ability and without strong financial system to intermediate investment risk and opportunity, the inflows could not be directed to its most productive use, but instead potentially concentrate on consumption and real estates which then drive up bubbles, and thus wasting resources.
Third, the biggest challenge is to develop and strengthen institutions, which are essential in well-functioning modern economy. A lot has been improved, yet a lot more needs to be done. Indeed, limited institutional capability constraints government’s ability to regulate the economy and to manage impacts of economic shocks, as can be witnessed during the 2008 financial crisis and the struggles to control food prices (i.e. in 2007 and currently). Furthermore, with a high level of dollarization, Cambodia’ economic policy instruments are very limited. For instance, the instruments to conduct discretionary counter-cyclical monetary policy are not available (except reserves requirement by NBC). The scope of fiscal policy, for another example, is constrained due to weak domestic revenue and dependence on foreign aid. Also, the current level of efficiency and effectiveness of Cambodian institutions lags far behind its economic transformation. This asymmetry largely explains why growth is highly concentrating in the city and mostly among the politically connected class.
In short, the base of Cambodian growth is still fragile and narrow (garments, tourism, construction, and agriculture) while the policy response options to cushion against shocks are limited due to its institutional capability and arrangement. As economic growth is being recovered, key challenges that had not been largely addressed during the decade of rapid growth needs to be resolved. To sustain its growth in the coming decades, therefore, Cambodia needs to diversify its economic base, enhance its institutional capability, create preconditions for careful and gradual de-dollarization to a lower level to have more policy space for macroeconomic policies, and promote more inclusive growth and business climate (i.e. lower transactions and informal costs).