Cambodia’s Economic Challenge

Recent Features

Features | Economy | Southeast Asia

Cambodia’s Economic Challenge

Even as the skyline of Phnom Penh grows with the symbols of modern architecture, Cambodia’s economy still faces a host of challenges.

At 187 meters, Vattanac Tower is currently the tallest building in Cambodia. Workers are still adding the last window frames to the top floors but the structure stands finished.

It overtook 118m Canadia Tower last year and may soon be overtaken by the more ambitious Gold Tower 42, a project currently stalled at around 20 stories, which all but completes this triumvirate of new skyscrapers in Phnom Penh’s rapidly rising Central Business District.

Designed to look like a Chinese dragon pointing out to the Mekong River, Vattanac Tower is all feng shui, glass and steel designed by British architects and built with an estimated $170 million of Cambodian cash.

David George, country manager of CBRE, one of the building’s letting agents, notes that Vattanac will be the first and only Grade-A office space in Cambodia when the first eight floors open for business in the first quarter of 2013.

“If you were in Thailand or Hong Kong, this is comparable in terms of quality,” he says.

Meaning “progress” in Khmer, Vattanac symbolizes an economy that stalled during the financial crisis, causing construction to slow, but which is once again on the upswing.

“You need the domestic market to be working for these kinds of buildings to go up,” says George.

On the surface, Cambodia’s economy is certainly improving. In September, the IMF raised its 2012 GDP growth forecast from 6.3 to 6.5 percent and, in Asia, only China and Laos are tipped to grow faster in 2013. The World Bank’s December forecast predicts Cambodia will experience an average annual GDP growth rate of 7 percent over the next five years.

But the positive statistics obscure the potentially debilitating structural issues: namely, the economy is susceptible to external shock.

The World Bank forecasts a 0.5-percentage point fall in GDP growth for 2012 versus the previous year mainly due to an anticipated drop in garment and agricultural shipments, which together account for 90 percent of Cambodia’s total export earnings.

Although garment exports climbed nearly 10 percent to U.S.$3.54 billion in the first nine months of 2012, consumer confidence in Cambodia’s biggest market, the United States, is believed to have declined in December as Washington struggled to reach a consensus on tax hikes and spending cuts ahead of the New Year. Meanwhile, demand for garments in the EU, Cambodia’s second-largest market, remains sluggish as the euro-zone crisis persists. In other words, the festive shopping period in the West is not expected to have been that merry for garment producers in Cambodia. But projects like Vattanac Tower have softened the blow.

“The overall impact on the industry sector is somewhat mitigated by the strong performance of the construction sector in the first half of 2012,” the World Bank said in its report.

Tourism is also booming as ever-larger numbers of overseas visitors head to Cambodia’s star attraction Angkor Wat. On December 31, Cambodia looked to further tap into the millions of visitors to Thailand each year as the two neighbors started a joint visa scheme.

But Phnom Penh-based economist Chan Sophal says that with garments and tourism remaining crucial pillars of growth, confidence in an economy with so much room for expansion must be tempered by its vulnerability to external shocks.

At the height of the global crisis in 2009, Cambodia saw one of the most severe positive-to-negative GDP swing in East Asia as it recorded a mild recession following a period of booming growth.

“It [the economy] is still dependent on external factors in the short and medium term,” says Chan Sophal.

Like many of the region’s rapidly growing economies, the growth data and positive headlines coming out of Cambodia belie the staggering lack of progress on the ground.

When ruling party senator and sugar tycoon Ly Yong Phat opened a new sugar refinery in Kampong Speu province last week, he promised total investment of $400 million.

“We are trying to make the rural areas of Cambodia into a business place,” he was quoted by the Phnom Penh Post as saying.

Some 10,000 workers are to be hired for the project, which includes sugar cane plantations, said Ly Yong Phat. But wages start at just 12,000 riel (U.S.$3) per day, he added, and there are fears that in creating these low-paid jobs, the project may simultaneously wipeout the livelihoods of some farmers. In a country with a notoriously poor record on land rights, Ly Yong Phat is considered among the worst offenders, according to rights groups.

At the same opening ceremony, Prime Minister Hun Sen gave his most explicit endorsement yet of a Cambodian trickle-down economic model, which has seen a wealthy few get richer while the majority remain among the poorest in Southeast Asia.

“Make the bosses rich in Cambodia,” Hun Sen said, Cambodia Daily reported. “Because when there are problems – for example when people need help with flooding – our local investors contribute a huge amount of money.”

Critics argue that Hun Sen’s emphasis on the rich has prevented many in the country from escaping poverty. The Gini coefficient, which measures inequality with zero being perfect equality, climbed from 0.35 in 1994 to over 0.4 in 2004. Although crime – a key concern for multinationals looking to invest here – has dropped in recent years, the U.S. State Department still warns potential American tourists that “Cambodia has a high crime rate, including street crime.” Furthermore, widespread protests over issues like land disputes, low wages and conditions in garment factories remain a frequent occurrence.

About 300 workers protesting in Phnom Penh recently threatened a mass strike in the New Year should Hun Sen fail to lift the minimum wage above $61 per month, more than in Bangladesh but below average incomes in rival garment producing nations such as Vietnam.

Despite an ILO-led Better Factories initiative that was supposed to make Cambodia a model for low-income clothes manufacturing, there have been a series of reported mass-faintings in recent years and conditions are reportedly as bad as ever. Recently, the Phnom Penh’s appeals court upheld murder convictions on two men widely deemed to have been framed over the 2004 killing of prominent union leader and government critic Chea Vichea.

The judiciary is seen as among the weakest institutions in a country which languished in 157th place out of 174 countries included in Transparency International’s 2012 corruption perception survey. This was slightly better than its 164 ranking Cambodia received the previous year when Transparency International studied more countries.

“The system is still very corrupt,” says economist Chan Sophal. “[This] may be good for some investors but not so good for others.”

Steve Finch is a freelance journalist based in Bangkok. His work has appeared in the Washington Post, Foreign Policy, TIME, The Independent, Toronto Star and Bangkok Post among others.