Key Sectors Challenged by Downturn: UNDP

By Ros Sothea, VOA Khmer
Original report from Phnom Penh
10 July 2009

The world economic crisis is having a direct impact on four of Cambodia’s key economic drivers, which will need to become more competitive, according to a report released by UNDP this month.

Agriculture, construction, garments and tourism each face challenges from the economic downturn, and “Cambodia now needs to consolidate its progress, nurture its potential and sustain its growth,” the UNDP said in its report, “Cambodia Country Competitiveness: Driving Economic Growth and Poverty Reduction.”

“It is a unique opportunity right now,” Douglas Broaderick, the UNDP’s chief representative, told VOA Khmer. “Cambodia needs to get some of the things done that could set-up Cambodia to be stronger economically and to be able to help people in a much better way, in terms of competitiveness linked to economic growth.”

The agricultural sector, which generates a third of Cambodia’s GDP and employs more than half its workforce of 8 million people, suffers from low education in the rural work force, limited access to financing, poor roads and irrigation and limited market access, the report said.

The UNDP recommended the development of rural non-farm economies, such as roads, rural electrification, education and financial training, as well as better coordination between suppliers and manufacturers.

And while the cost of labor is a main motive for garment manufacturers to come into Cambodia, productivity remains lower than neighboring countries, the report said, citing as an example productivity that is three times lower than in Thailand.

The UNDP also recommended that the government re-examine its investment laws, to improve the manufacturing of textiles and garments, which comprised 12 percent of the GDP in 2007 and employed more than 360,000 people.

The sector lost 51,000 jobs between September 2008 and March 2009, as a global economic crisis, kindled by a US financial meltdown, spread. Around 70 factories have closed in that time.

The UNDP recommended training workers to begin producing goods higher in value, and to improve industrial relations.

Meanwhile, competitiveness in the tourism sector remains poor, ranking 112th of 130 countries at a recent World Economic Forum, due in part to high energy costs and expensive flights, as well as limited infrastructure and costs associated with corruption, the UNDP said.

Human resources in the sector remain low, and an uneven application of policies and rules plagues the sector.

“Rich cultural assets, such as Angkor Wat, give Cambodia a competitive advantage, but reliance on Angkor Wat as the primary tourist attraction cannot be sustained,” the report said.

The UNDP recommened relaxing tourist visa restrictions, exploring open sky policies and reducing the costs and improving the quality of tourism products.

In the construction sector, Cambodia has enjoyed an increase in both scale and value of projects, including high-rise apartment and office buildings currently under construction.

The country has the lowest wages for construction workers in Southeast Asia, but productivity is relatively low and there are shortages of labor to meet demands and of skilled workers, the report said.

Engineers and architects are overwhelmingly foreign, while electricians, welders, carpenters and other skilled workers are in short supply.

Added to these difficulties is the complicated constrution law, which means it takes an average 710 days for approval of construction permits—compared to 200 days in Vietnam and 150 days in Thailand.

Companies say they resort to paying bribes in order to shorten the time frame.

“The highly bureaucratic regulation of licensing in the construction sector may reduce its competitiveness,” the report said.

Cambodia is at the bottom 10 percent of countries in the World Bank’s corruption index, leading to a dearth of investment from the world’s largest industrialized countries, whose own national laws forbid participation in corrupt practices.

The UNDP recommended investments in vocational training, improvements to permit procedures and the strengthening and enforcement of building standards.

With the four key sectors flagging, costs remain high in information and communication technology, discouraging further investment.

Overall, the UNDP recommended putting more resources into education, as Cambodia lags behind its Southeast Asian neighbors, ranking lowest in the region.

Cheam Yiep, a Cambodian People’s Party lawmaker and head of the National Assembly’s finance commitee, said the UNDP’s analysis was “just partly true,” but he did not elaborate.

Still, the goverment will take the report’s findings under consideration, he said.

Out Of Luck?

UNFORTUNATE: Cambodian workers leave after their shift at a garment factory in Phnom Penh. (Photo courtesy: TANG CHHIN SOTHY/ AFP)
UNDER CONSTRUCTION: Foreign companies that were the main drivers of the Cambodia’s construction sector have been winding down their activities in response to developments in their home countries. (Photo courtesy: TANG CHHIN SOTHY/ AFP)
BONE OF CONTENTION: The Preah Vihear temple. (Photo courtesy: The Straits Times/ AsiaNews)

2009-01-31
By BRUCE GALE In Phnom Penh
The Straits Times (Singapore)
AsiaNews

Just as the stage seemed set for further growth, the four drivers of Cambodia’s economy—agriculture, garment exports, tourism and construction—were hit by changes in external conditions.

"Unlucky.” This was the assessment of the Cambodian economy by Vikram Nehru, the World Bank’s chief economist for East Asia and the Pacific, late last year. It certainly seems appropriate.

While citizens in just about every country in the region can blame the current global economic storm for at least some of their problems, Cambodians probably have more reason than most to feel aggrieved.

Still one of the world’s poorest countries, Cambodia was nevertheless doing well before the global crisis hit. Recovering from a long period of political and social disruption dating back to the 1970s, the economy grew by an average of 11.1% a year between 2004 and 2007.

And the elections of July last year, which saw a landslide victory for the ruling Cambodian People’s Party, suggested that the country would soon be able to add political stability to its list of attractions.

The garment sector, which began to expand rapidly in the mid-1990s, provided employment for about 350,000 people. The tourism industry was also booming, with the number of foreign visitors rising by more than 20% annually. Further evidence of the country’s success could be seen in the growing level of direct foreign investment, which reached a high of 10% of gross domestic product (GDP) in 2007.

There were problems, of course. They included rampant corruption, rising inflation, a dysfunctional public service, infrastructure bottlenecks and a developing property market bubble. But with the economy making great strides, and with leaders no longer preoccupied with political survival, there was hope that at least some of these issues would be addressed.

Indeed, soon after the elections, economic managers moved quickly to minimise financial sector risks arising from the enthusiasm with which local banks were rushing to profit from the economic boom. The central bank doubled reserve requirements in July, introduced a ceiling on loans to the real estate sector, then tripled capital requirements in September. Meanwhile, plans were well advanced for the establishment of a stock market.

But just as the stage seemed set for further growth, the four drivers of the Cambodian economy—agriculture, garment exports, tourism and construction—were hit by changes in external conditions.

The tourism industry got into trouble as early as July, when the decision by Unesco to list Preah Vihear temple as a World Heritage Site resulted in a military stand-off between Cambodian and Thai forces. Cambodia also suffered from the effects of Thailand’s internal turmoil last month, when anti-government protesters forced the closure of Bangkok’s international airport. The result was a wave of cancellation of hotel reservations at Siem Reap during the height of the tourist season. The global financial crisis looks set to cut further into tourist arrivals.

The garment industry, meanwhile, has begun to suffer from lower demand in the United States, its main export market. Expectations that rice exports would boost economic growth have also been dashed by the fall in international prices since their mid-2008 peak.

The juxtaposition of these political and economic developments has already been reflected in a 25-per-cent drop in revenues from the kingdom’s trade-dependent railway network last year. Rail links with Thailand were cut completely during the tension with Thailand in October.

Finally, South Korean and other foreign companies that were the main drivers of the nation’s construction sector have been winding down their activities in response to developments in their home countries. Modern Cambodia’s first-ever property boom is no more.

Influenced, perhaps, by years of rapid growth, the government late last year rejected as too gloomy an International Monetary Fund report that suggested that GDP growth would fall to 4.8% this year. But officials have since responded to the global slowdown by announcing a budget that increased spending and offered incentives to the garment industry. They have also delayed the launch of the stock exchange.

Early last month, foreign donors demonstrated their continued faith in the country by pledging more than US$950 million in aid, an increase of almost $300 million over pledges made in 2007.

Even so, there is little doubt that the nation faces difficult times. Foreign direct investment fell last year and, according to the World Bank, will likely fall again this year.

With the garment and tourism sectors faltering, widespread unemployment is a distinct possibility. Fifty per cent of the population is under 20 years of age, suggesting that a large number of job seekers will begin to enter the workforce over the next few years.

Yet all is not lost. While international rice prices have fallen, they are still relatively high. Programmes designed to boost agriculture could help absorb some of the unemployed.

Meanwhile, continued strong supervision of the banking sector, an increase in government-funded infrastructure projects and further moves to upgrade the legal framework for investment could help prepare the country for the inevitable recovery. In times like these, Cambodia needs to make its own luck.