From 1999 to 2019, Cambodia’s economy experienced a 7.7% compound annual growth rate and a fivefold increase in per capita income. However, the country’s structural weaknesses were exposed during the COVID-19 pandemic, leading to a sharp contraction from 7% growth in 2019 to 3% in 2020. Cambodia’s economic landscape is characterized by a narrow export base and a limited set of export destinations, with key export commodities like garments, rice, and cassava accounting for approximately 80% of total exports. The World Bank’s 2023 growth forecast is based on the looming global economic deceleration, with factors such as a slowing Chinese economy, waning demand for garments, a sluggish resurgence of Chinese tourist inflow, tighter financial conditions, and a downturn in the construction sector.
However, a diversified economy could provide Cambodia with robustness and holistic economic developmental potential. Sectors such as agro-processing and manufacturing could emerge as game-changers, leveraging Cambodia’s abundant agricultural resources and burgeoning young demographic to establish a resilient growth paradigm and catapult the country towards high-income status by 2050. Cambodia’s agro-processing sector represents an untapped wealth of potential, but its current focus on rice, rubber production, and pepper cultivation has resulted in a substantial economic deficit. In comparison, neighboring countries like Thailand and Vietnam generate income worth 102 billion and 44 billion respectively in 2018, while Cambodia records a meager $590 million.
Cambodia’s producers face challenges of oversupply and limited processing capacity, leading to arbitrary and unfair prices for their perishable crops. Expanding the agro-processing industry could help address this issue and increase value from agricultural exports. The light manufacturing sector, once the main bicycle supplier in the EU, has also shown potential. Addressing the skills gap in Cambodia’s agro-processing and manufacturing capabilities can be achieved through Technical and Vocational Education and Training (TVET). With over 50% of the population working-age, less than half have completed high school. Partnering with skill-training agencies or tech companies can help transform this process. To address human capital development, foreign firms should invest a portion of their profits into ongoing training for Cambodian workers for three to five years, aligning with the tax incentive period.
Cambodia faces a significant challenge in transitioning to new industries due to a 19% shrinkage in tax revenue in the first half of 2023. The government needs to use national savings to address a budget deficit of $412 million. As Cambodia develops, it may lose access to foreign direct investment-rich markets and need to mobilize domestic resources. Instead of increasing taxes, the government should focus on curbing corruption, simplifying tax compliance, and digitizing business operations to lower operating costs. This would attract domestic investments and new ventures, boosting voluntary tax revenue. Affluent Cambodians and private businesses should invest in strategic public-private partnerships to fund the agro-processing industry and support skill training for workers in manufacturing. Technology transfer and innovation could be further sparked by partnerships between foreign and domestic companies and tax incentives or reductions for tech and machinery imports.
