By Daniel Mitchell
Processing wet starch in Kampong Cham, Cambodia. Source: CIAT International Center for Tropical Agriculture.
Prime Minister Hun Sen on March 6 announced Cambodia’s first Industrial Development Policy (IDP), nearly a year after setting the goal for Cambodia to reach upper middle income status, as defined by the World Bank, by 2030. Reaching the World Bank’s threshold would require Cambodia to reach a $4,036 gross domestic product per capita from the current $1,007, and an average growth rate of over 9 percent, or higher than the 7.2 percent average growth rate the World Bank has forecast for the next four years. The new IDP, drafted by the Supreme National Economic Council, reflects the government’s plan to bridge that gap.
The primary objective of the IDP is to make industry, rather than agriculture, the largest sector of the economy. The IDP’s principle strategy is the vertical integration of existing subsectors of garments and food processing and expansion of light manufacturing. The IDP is generally consistent with Cambodia’s economic development policies over the past decade of addressing the common themes of low levels of skills and education of the workforce, high costs of energy, and lack of infrastructure.
At the same time, it marks a continuation in the evolution of the ruling Cambodian People’s Party’s (CPP) strategy since the 2013 national election, which resulted in its narrowed majority and subsequent opposition-led protests and labor strife.
According to the IDP, the government will focus on “absorbing excess labor from the low productivity agriculture sector” into the industrial sector. Historically the CPP has drawn most of its support from the countryside’s population, which is primarily engaged in agriculture. However, the dynamics of Cambodia’s rice bowl politics are rapidly changing. Employment and income are going to be key issues in the 2018 elections, especially among young voters. Garment workers have made their presence disproportionately felt in the aftermath of the 2013 elections. Contrary to media portrayal, the CPP is concerned about winning the next elections. The number of voters who work in the industrial sector is anticipated to surge by 2018.
Meanwhile, as the agricultural sector modernizes, it will require less labor. Cambodia’s rural households are increasingly subsidized by family members working in urban factories, and strife in factories may have a direct effect on rural votes.
The announcement of an IDP is the first time a national policy has been formulated to drive the direction of the industrial sector. Cambodia’s industrial sector was effectively reborn when the Bill Clinton administration decided to increase the quota for garment exports from Cambodia in 1996, after the country was judged as having met specific criteria to improve its labor laws and conditions. The quota increase led to an initial spike in foreign direct investment into Cambodia, but the Cambodian garment sector has since lost its competitive edge due to rising wages and costs. Garment orders grew by 1 percent in 2014 from 20 percent in 2013, according to the Garment Manufacturers Association in Cambodia.
An important focus of the IDP is to capture larger portions of the value chains in garment and agriculture. According to government data, the industrial sector contributed an estimated $3.75 billion, or about 24 percent of the country’s $15.6 billion gross domestic product (GDP), in 2013. But analysis of World Bank’s and government data shows that of Cambodia’s $5.7 billion garment exports, $ 4.1 billion is the re-export of imported raw materials, capping the net contribution of the industry to GDP at $1.4 billion; less than half of the contribution of the total industrial sector to the economy. Investment in manufacturing of materials that are currently imported would allow Cambodia to capture a greater portion of the supply chain.
In the agricultural sector, unprocessed products such as un-milled rice are exported because of a lack of domestic milling capacity. Development of the food processing subsector will likely help Cambodia capture additional value in the food supply chain.
Finally, the IDP raises the issue of poor coordination between and within ministries, in what is perhaps an introspection by the CPP. This lack of coordination has hurt Cambodia’s attractiveness to foreign investment, which is critical for this policy to be realized. The IDP was a prerequisite to efforts to address this issue, including revisions to existing laws on investment and special economic zones, both of which are critical for making Cambodia’s next phase of development a reality.
Mr. Daniel Mitchell is the CEO and Managing Director of SRP International Group Ltd., and serves on the Board of Governors of the American Chamber of Commerce in Phnom Penh, Cambodia.
