Building the foundations for inclusive and sustainable economic growth in Cambodia

UNDP
Napoleon Navarro, Marissa Foraci and Sovannarith Hang



As the world commemorates the International Day for the Eradication of Poverty, one lesson is reaffirmed: while economic growth is necessary, it is not sufficient to eradicate all forms of poverty.

Cambodia’s GDP grows at an annual average of 7 percent which has helped raise average incomes, reduce poverty, enhance human development and realize improvements in income inequality. In July 2016, Cambodia crossed over to the lower Middle Income Country (MIC) category and now aims to realize Upper MIC status by 2030.

It is an opportunity that 60 percent of Cambodians are between 15-30 years of age. But with 64 percent of the population employed in agriculture — and 51 percent of the agricultural labor force are female — the sector has barely grown in the last decade.

While the manufacturing and construction sectors grew, many Cambodians remain in low productivity jobs and livelihoods. With the average years of schooling ranging from 4.4 - 4.7 years, unskilled workers make up close to 60 percent of the workforce.

While poverty declined, the poor have not gotten too far, with incomes just above the poverty line. In Multidimensional Poverty Index (MPI) terms, 21.6 percent of the population may be over the MPI threshold but remains vulnerable to slipping back to poverty. Around 54.6 percent of the population are either below or just above the poverty threshold (OPHI, 2015a). A significant section of the young work force can be categorized as working poor, and thus vulnerable to a range of health, economic and natural shocks (ILO, 2016b). Therefore, if the country is to reduce vulnerability and move away from poverty, it needs to raise its returns to labor.

Young people need better remunerated formal jobs through economic diversification. With a high labor participation and a rising formal employment, better employment opportunities need to expand particularly for women and youth.

While the share of manufacturing in merchandise exports stood at 92.8 percent, Cambodia only participates in the production segment of garments which generates the lowest value addition in that value chain. Low skill levels and high utility costs further prevent businesses in Cambodia from moving upward in the global value chain (ADB, ILO, 2013).

Workers participating in these value chains receive incomes that provide the youth with less incentive and less financial ability to remain in school. Low wages push thousands of Cambodian youth to migrate to neighboring countries such as Thailand where the minimum monthly wage is US$ 300, compared to the US$ 153 monthly minimum wage in the Cambodian garments sector. This reinforces the prevailing labor market situation of low skills and low worker productivity, while putting pressure on wages.

Rural young working-age population need better job opportunities. Many farmers cultivate low value-added varieties that are not well-linked with the markets. Many rural households are also highly vulnerable to climate risk. Agriculture infrastructure can be obsolete and insufficient to both satisfy the domestic demand and seize international export opportunities.

With the booming construction sector and migration flows to neighboring countries, women and grandparents are left to care for families left behind and bear the burden of a vulnerable livelihood.

The Cambodian agricultural sector is highly vulnerable to climate events and the women are in the forefront of the challenge. The negative impact of climate change and with the high incidence of climate hazards has rendered the already modest returns from a rain-fed agriculture even more unpredictable and uncertain.

The lack of any form of protection from climate such as weather indexed insurance, pushes farmers to deplete their already limited financial resources to cope with climate risk, further eroding their limited capital and savings and contributing to a cycle of increasing indebtedness and rising vulnerability.

The young working age population needs to have access to financial instruments to help them save for old age. Cambodia is enjoying today its first demographic dividend, a period when the size of the working-age population (ages 15 to 64) increases relative to the size of the younger and old-age population groups. This demographic dividend in Cambodia is estimated to last until 2038 (MOP, 2013).

Economic growth from the first demographic dividend depends on many factors including the speed of fertility decline and the improvements in the productivity of workers. As the growth of per capita income slows down, the window of opportunity for the first demographic dividend may likewise narrow.

However, if the right policies are in place, the transition can yield a second dividend, one that can be potentially long-lasting and larger than the first (Lee & Mason., 2006).

The second demographic dividend is financial in nature; the increase in adult longevity encourages individuals to save more for old age. The second demographic dividend could thus be in the form of long-term savings that can potentially contribute to capital accumulation and economic growth at the macro-level, and resilience at the household level.

For countries to exploit the second demographic dividend, sound and trusted financial systems need to be accessible to the young working age population to secure their financial future (Lee & Mason., 2006). However, the formal Cambodian social security system offers old age insurance only for the public and private formal sectors. The social security system is unable to mobilize the potential contributions of the 66 percent of the population working in the informal sector. Further, the market currently offers short-term savings products of 1 to 3 years, while long-term savings/pension products of 5-10 years are not available (ILO, 2012).

In summary, if the returns to labour are to be increased, Cambodia will need to diversify the economy providing productive employment opportunities for the 275,000 youths reaching the working age population annually (ILO, 2008). It also needs to make agriculture more productive to provide higher returns to labour to young people who would remain employed in rural jobs. Lastly, there is a need to enhance long-term savings to build-up financial assets and strengthen household resilience and set the foundations for inclusive and sustainable economic growth.