Factor to the Low Income Country Has the Greatest Impact of Economic Growth

Cambodia is currently experiencing something of an economic renaissance, in particular vs. where the country has been. In the late 1970s, Cambodia faced brutal government under the Pol Pot regime. The cities were emptied as the Khmer Rouge mobilized the nation's entire workforce to produce rice, most of which was exported to China. As part of this reorganization of society, the Khmer Rouge killed all dissidents, intellectuals or people of skill. The result was that, when the Vietnamese liberated the country, Cambodia had absolutely no functioning economy, and no people who could drive the economy and the country forward. The Khmer Rouge lingered on as a force in the country for a long time, further stunting opportunity for economic development. Now today, Cambodia's economy is beginning to show signs of life.

Facts & Figures

The country's GDP has increased an average of more than 6% per year since 2004, including 6.5% in 2012 and 7.1% in 2011. Even with this, however, the GDP per capita remains one of the lowest in the world at $2,400, reflecting of the awful circumstances this country faced for the first few decades of post-colonial life. The main drivers are tourism, garments an construction. While the industrial production growth rate is 9.2%, good for 20th in the world, the country is still largely agrarian, where 35.7% of the economy is in agriculture, much of it subsistence. While there is no official unemployment, most Cambodians struggle to make ends meet and 20% live below the poverty line (CIA World Factbook, 2013).

In terms of other indicators, the steady growth has fostered some stability. Inflation is low at 2.9%, and was 5.5% in 2011. This has held the exchange rate to a relative stable level as well. In part, however, this is because the U.S. dollar is the unit of currency for many transactions, or alternately the Thai baht. Cambodia's lack of industrial production leaves it with a current account deficit of $1.2 billion in 2012, equivalent to 8.4% of GDP. Hindering development is the fact that its major export markets are far-flung -- the U.S., UK, Germany and Canada combine for well over half of Cambodia's trade. Trade in Asia is underdeveloped (CIA World Factbook, 2013)..

Analysis

At present, Cambodia's main source of economic growth comes from foreign direct investment. Much of this is in the tourism sector, although there are gains made in textiles as well. The tourism industry is focused around Siem Reap (location of the ancient city of Angkor) and the capital of Phnom Penh. The sector provides ample employment opportunities, albeit in low-level service sector roles. These jobs are concentrated, however, and there are many areas of the country, especially rural districts, that see basically no money from this investment. The tourism sector is still experiencing an infrastructure boom, with new hotels being built and with new flights being added to the major airports.

Most of Cambodia's neighbours have strong economies. Vietnam has a rapidly-growing economy and Thailand has experienced periodic surges in growth. There is still a fairly poor surface transportation infrastructure that holds back the growth of the sector, for example the roads connecting the two major cities are still fairly poor and many rely on river transport. The aging railway infrastructure was built by the French during colonial times and needs significant upgrade to be a viable link to the rest of the world. Rail and highway links with Bangkok and Saigon, which in turn are connected to China, Malaysia and Singapore, would help the development of the Cambodian economy.

A major bright spot has been the textile sector. Cambodia has competitive advantage in the cost of labor, land and raw materials, and this has allowed it to compete at the low end of the textile market. However, there is little traction from this production to more sophisticated, higher-value-added production. As a result, the country is growing, but not as rapidly as it could be.

Education infrastructure remains weak, but the presence of new employment opportunities is encouraging. Most education is tuition-based, so it is necessary for parents to have employment in order to send their kids to school. In recent years, education levels have been rising as more Cambodians are employed outside of agriculture. The influx of foreign investment into the country should increase the aggregate demand in the economy. The key to fostering sustained growth in Cambodia is that the country will need to be able to improve its supply of quality goods. It cannot rely on infinite growth in tourism, so it needs to leverage its cost advantages to improve its manufacturing and service sector capabilities. This will require improvements in education and training. Remember that Cambodia basically started from scratch in 1979, so the first generation of Cambodians who are educated are only now hitting their peak earning years. It is imperative that there are opportunities not just for this first wave to lead the country forward but for the educated young people to find gainful employment. There remains the risk that many will seek opportunities in Thailand, Vietnam or elsewhere. Cambodia can ill-afford a brain drain, and retaining its educated people will be the key driver of success going forward. They will be entrepreneurial enough to attract business, because of the cost advantages.

A further factor for the future economic growth of Cambodia is going to be the reduction of corruption. Cambodia is one of the most corrupt nations in the world, and this reduces its economic efficiency significantly. Corruption is also a major barrier to entrepreneurism, so reducing corruption will free up more capital for domestic investment and the creation of jobs locally. Further, Cambodia competes for business with other Southeast Asian countries, so it needs to be able to win business. This will not happen if it is more corrupt than the countries against which it is competing for business.