ASEAN Economic Community offers Cambodia a leg up

11 February 2015

Author: Heidi Dahles, Griffith University

As Cambodia is coming to terms with its changed political landscape after the 2013 elections, a new era of economic development is dawning. Whether the country will be able to secure long-term economic and social development largely depends on its capability to integrate itself successfully into the ASEAN Economic Community (AEC), which may or may not meet its deadline set for the end of the year.

Economically, Cambodia has done well this decade. Its GDP grew at an average rate of 7 per cent per year in 2010–14, and a similar growth rate is expected to be accomplished again this year. But this growth rate can only be sustained in the future if the country substantially improves its competitiveness through economic diversification, inclusive development, better education and institutional capacity building.

Cambodia’s long-term growth prospects within the AEC could be hampered by the narrow base of its export industry which largely depends on garment production, milled rice and tourism. New sources of economic growth are called for. At the same time, Cambodia needs to further reduce its dependence on aid donors. A substantial proportion of Cambodia’s skilled workforce is absorbed by the ‘development industry’ financed with foreign aid money. Transformation of this sector through commercialisation is slow.

Conversely, China is now Cambodia’s largest foreign investor, a major donor of aid and an increasingly important trading partner. In return for its generous financial injections, China has exerted its influence on Cambodia to promote Chinese political interests. This may hamper Cambodia’s full integration into the AEC.

For Cambodia to benefit from trade opportunities in the AEC, the country needs to improve its hard infrastructure: in particular its transportation system, energy supplies and internet access to facilitate its integration in continental Southeast Asian production and logistics networks. The final resolution of the Cambodian–Thai dispute over the Preah Vihear temple would greatly contribute to economic cooperation across continental Southeast Asia, in particular on the Bangkok–Hanoi axis.

Infrastructural improvement and integration into regional networks may help Cambodia to successfully tackle its greatest challenge: developing a vibrant community of domestic entrepreneurs. The Cambodian government has focused on attracting FDI and has neglected incentives for domestic businesses, such as research and development schemes and credit facilities. As a consequence, Cambodian businesses lack an innovation-driven entrepreneurial spirit.

Membership of the AEC may provide access to intra-Asian FDI that could boost small and medium business growth. But institutional conditions have to be created to enable Cambodian businesses to benefit from such investments. The main barrier here may be the fact that much of the labour force lacks adequate education and training.

Cambodia’s education system is in dire need of improvement. While donor money has helped to improve primary education, secondary and particularly tertiary education both lag behind. There is a lack of qualified staff, inadequate curricula and teaching methods, lack of quality assurance, a rural–urban divide in enrolments, falling completion rates, and insufficient collaboration between industries and universities for research and development activities. Much of the higher education sector is commercially driven.

While an increasing number of foreign universities are opening branches in Cambodia, the domestic economy is unable to absorb the burgeoning number of graduates. Unemployment among Cambodian graduates is soaring. The question is whether the AEC will provide an avenue for Cambodian graduates to find employment either at home or in the other member states of the ASEAN common market.

Hidden behind the shimmering façade of Cambodia’s sustained GDP growth is a narrowing but persistent gap between the new middle classes and the urban and rural poor. To close the gap, continuing land issues have to be resolved in order to end forced evictions and dislocation of rural people into urban slums. Efforts will have to continue to further improve the regulation of economic land concessions, a process started by Prime Minister Hun Sen two years ago. Where appropriate, land should also be redistributed to the land-poor through social land concessions. But for this to happen, more radical changes are called for.

Corruption and weak institutions also hold Cambodia back from erasing poverty. Despite the adoption of the Anti-Corruption Law in 2010, corruption is still widespread. Favouritism by government officials is part and parcel of a patronage system that permeates all realms of Cambodian life. Cambodia’s ruling class and tiny business elite form an ‘elite pact’ that revolves around the exploitation of Cambodia’s most valuable economic resources. Participation in the AEC may help to restrain the power of this elite by enhancing institutional capacity-building across the ASEAN community.

While the AEC will dramatically transform the economic conditions in the region, it will pose hitherto unknown challenges to Cambodia’s economic and political future.

Professor Heidi Dahles is Head of the Department of International Business and Asian Studies at Griffith Business School, Griffith University.