Cambodia S u s ta i n i n g s t ro n g g row t h for the benefit of all A Systematic Country Diagnostic Report No. 115189-KH This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Attribution Please cite the work as follows: World Bank. 2017. 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Context: Cambodia’s development trajectory 28 Cambodia, from conflict to success as a highly open export-oriented economy… 28 … with persistent governance challenges… 30 … and a large rural population that still depends on agriculture and remains vulnerable 31 3. What have been the drivers of stellar growth and poverty reduction performance in Cambodia? 36 3.1. Success in poverty reduction thanks to job creation and a windfall from higher agricultural commodity prices 36 Cambodia has been one of the leading countries in poverty reduction and shared prosperity 36 The drivers of poverty reduction have been low-skilled urban job creation and agricultural expansion 40 3.2. Cambodia’s main engines of growth to date: export-led growth linked to basic human and natural resources 43 Cambodia has enjoyed blistering growth in labor-intensive exports of goods and services 43 Workforce expansion has been driving economic growth in Cambodia, while labor productivity gains have been more modest than in other fast-growing countries 45 The levels of capital accumulation and savings have been lower than in other economies experiencing sustained fast growth 47 4. What are the challenges Cambodia faces in sustaining strong growth and improving equity outcomes over the next decade? 52 Going forward, increased human and physical capital are needed for Cambodia to reap the demographic dividend and reach upper middle-income status 52 4.1. Challenges to economic diversification 54 Declining external competitiveness and erosion in preferential treatment challenge exports 56 Informal competition and fees challenge the creation of a vibrant private sector 62 The available skills are unlikely to meet the upcoming needs of firms 68 4.2. Constraints to household economic mobility 72 Beyond extreme poverty, socioeconomic mobility has been limited 72 Limited access to education and land inhibits socioeconomic mobility 73 Persistent malnutrition affects learning outcomes and human capital formation 75 Exposure to health and environmental shocks compounds challenges to achieving socioeconomic mobility 78 Challenges in public service delivery affect human development outcomes 79 5. Is the current development model sustainable? 86 5.1. Risks to the sustainability of macroeconomics and public finances 86 Although public finances remain sustainable, maintaining public investment levels will become more challenging 86 Macro-financial vulnerabilities are rising due to a credit boom 89 5.2. Risks to social sustainability 94 Although a large number of women joined the workforce over the past two decades, significant gender gaps still exist 94 Some groups in Cambodia still experience exclusion and discrimination, heightening their vulnerability 97 While progress has been made, land disputes and displacement remain an issue in Cambodia 99 5.3. Risks and opportunities for environmentally sustainable and resilient development 100 Unsustainable economic activities are associated with a degradation of natural capital, increasingly endangering their contribution to the economy and poverty reduction 100 Climate and disaster risks compound environmental sustainability challenges 102 Poorly planned urban development heightens risks and may constrain growth 104 Sustainable growth is faced with tradeoffs for competing demands on natural capital 106 6. Priority interventions to encourage strong, inclusive, and sustainable development in Cambodia 110 6.1. Determining areas for development and priority interventions 110 Constraints to economic growth 115 Constraints to accumulation of household assets 118 6.2. Pathway 1: Increasing economic competitiveness and diversification to sustain strong growth and create jobs 123 Reducing the costs of firm establishment and operation, including electricity costs and trade transaction costs 123 Boosting public and private investment in infrastructure and machinery acquisition while developing capital markets 125 Strengthening regulation and supervision of the financial sector to mitigate risks from strong credit growth, while building further financial inclusion 127 Fostering agricultural modernization in the aftermath of the commodity price boom 129 6.3. Pathway 2: Building human assets to facilitate economic mobility and shared prosperity 131 Endowing people with skills by boosting attainment and learning outcomes of secondary and higher education 131 Investing in the early years 135 Protecting households from shocks 136 6.4. Pathway 3: Ensuring a sustainable growth pattern by investing in natural capital, climate resilience, and sustainable urban development 138 Maintaining and developing natural capital, while strengthening climate resilience 139 Promoting competitive, sustainable, and inclusive cities through integrated urban planning 142 6.5. Cross-cutting: Public administration and public financial management reforms for improved service delivery 143 6.6. Data constraints and identified knowledge gaps 146 7. References 149 Annexes 1. Benchmarking Cambodia’s Development 160 2. Insights into poverty measurement in Cambodia 165 3. Using Cluster analysis to inform prioritization in Cambodia 168 4. Cambodia SCD engagement with stakeholders 170 List of tables 1. Cambodia SCD team members 11 2. Cambodia SCD pathways and identified priority areas for development 18 3. Cambodia’s scores on LDC graduation criteria 23 4. Nearly all types of households and areas experienced a reduction in poverty in 2007-14 39 5. The agricultural sector has experienced rapid land-use expansion and growth in yields 48 6. Rural land ownership and land sizes have been decreasing in recent years 73 7. Public sector wage bill for selected country groups, latest available year 87 8. Top areas for development from individual questionnaires and meeting discussions 111 9. Cambodia SCD pathways and identified priority areas for development 113 10. Classification of households by endowments, livelihood, and vulnerability (2013) 120 11. Education determines avenues to better prosperity 121 12. Pathway 1: policy options to increasing economic competitiveness and diversification 124 13. Pathway 2: policy options to building human assets 132 14. Pathway 3: policy options to investing in natural capital, climate resilience, and sustainable urban development 140 15. Cross cutting: policy options to improving public service delivery 144 16. Benchmarking Cambodia’s Development in a snapshot 160 17. Cambodia’s progress towards the Millennium Development Goals 163 18. Top areas for development from individual questionnaires and meeting discussions 172 List of figures 1. Cambodia still lags behind on some dimensions of economic competitiveness 14 2. Cambodia rates relatively low on certain governance indicators 31 3. Cambodia stands out in agriculture value-added and rural population 32 4. Cambodia has achieved impressive progress in poverty reduction over the past decade 37 5. Household ownership of assets and housing amenities have improved significantly 37 6. Growth became pro-poor after 2007, in the context of high agricultural commodity prices 38 7. Cambodia still faces challenges in non-monetary dimensions of well-being 39 8. Agricultural commodity prices boomed from 2007 to 2012 40 9. Household income sources have become more diversified in recent years 41 10. Households with income from domestic and international remittances has significantly increased in recent years 42 11. Growth in Cambodia has been driven by garments and services, with more volatile contributions from agriculture (including fisheries) and construction 44 12. Cambodia has experienced blistering growth in garment and tourism exports 45 13. Cambodia’s growth has relied on capital and workforce expansion, while labor productivity gains have been lower than in comparators 46 14. The labor productivity gap between the modern and traditional sectors has narrowed, partly contributing to some slowdown in structural transformation 47 15. Gross capital formation in Cambodia has been lower compared to almost all comparator countries, and the savings-investment gap has been growing 49 16. Cambodia’s share of equipment investment in total investment has not increased significantly, and the return to capital has been falling 49 17. Cambodia’s demographic dividend would need to be accompanied by higher physical and educational investments 53 18. Higher physical and educational investments would be needed for Cambodia to become an upper middle income economy by 2050 53 19. The dramatic shift in sector composition of Cambodia’s merchandise exports resulted in a high concentration in garments 55 20. Cambodia’s garment exports have been concentrated mainly on the EU and U.S. markets 56 21. Stagnation in garment labor productivity may be the result of firms specializing in low-productivity / low capital-intensive areas; foreign firms rely on foreign inputs 57 22. Export sophistication and emerging exports products have started to increase in Cambodia 59 23. Services exports are concentrated in tourism 61 24. The expansion of internet services in Cambodia has been overshadowed by the strong focus on mobile services 62 25. Cambodia lags behind comparators on availability of scientists and engineers and R&D 63 26. Biggest obstacle to firm operation 63 27. Informal practices and bribery incidence are high compared to structural peers 65 28. Cambodia’s transportation infrastructure and charges are competitive, but forwarding charges are overall higher than in competing countries 67 29. While electricity reliability has improved, tariffs remain relatively high compared to those in neighboring countries 68 30. The minimum wage is relatively high, while the education level of the workforce remains a concern to firms 69 31. Growth in the share of economically secure households has been slow, and living conditions lag behind comparator countries 72 32. Lack of secondary schools (left) appears to be highly correlated with the percentage of children ages 13-18 who are out of school (right), 2015 74 33. Proficiency levels in reading and math are generally very low, and progress has been mixed 75 34. Prevalence of stunting is higher among the poor (left), and Cambodia lags behind other countries in access to improved water and sanitation facilities (right) 77 35. Compared to other countries, Cambodia is highly exposed and vulnerable to disasters 79 36. Although access to electricity has improved, Cambodia still ranks second lowest in the region 80 37. Cambodia has achieved impressive progress in revenue collection, at a time when grants are dwindling 87 38. Public capital spending has been declining as a percentage of GDP since its peak in 2011, and expenditure in maintenance may not be sufficient 89 39. Dollarization has driven fast money growth 90 40. Dollarization has resulted in persistent current account deficits 91 41. Cambodia has had one of the fastest capital deepening episodes among its peers, driven by construction and retail 92 42. Fast penetration of MFI lending has taken place across both better-off and poorer provinces 93 43. Among surveyed countries, Cambodia has the largest outstanding MFI loans as a percentage of GDP, as loan sizes have increased 94 44. Gender equality in the enterprise 95 45. Conditional hourly wage and wage gap by education level 96 46. Cambodia’s forest cover decreased by 21 percent between 2006 and 2014 101 47. Cambodia’s environmental health and vitality are low, and its exposure and vulnerability to climate risks are high 103 48. Cambodia’s emissions per capita, including LUCF, are slightly higher than the average for Lower-MICs 104 49. Cambodia has a high urban population density 105 50. Top areas for development in collected postcards 112 51. Asset-based framework for achieving poverty reduction and shared prosperity 116 52. Identification of constraints to economic growth in Cambodia 119 53. Cambodia lags behind other peers in data standards and openness 147 54. Urban households are more likely than rural households to own durables 166 55. Participants in consultations, by gender and stakeholder type 171 56. Top areas for development in collected postcards 172 List of boxes 1. MDG attainment and LDC graduation criteria 23 2. Peer selection criteria 25 3. Asset-based framework for achieving poverty reduction and shared prosperity 116 Abbreviations ASEAN Association of Southeast Asian Nations LDC Least Developed Country ASYCUDA Automated System for Customs Data L-MIC Lower Middle-Income Country BSP Budget Strategic Plan LPI Logistics Performance Index CCT Conditional Cash Transfer LUCF land Use Change and Forestry CDC Council for the Development MDG Millennium Development Goal of Cambodia MFI Microfinance Institutions CMT Cut-Make-Trim MFN Most Favored Nation CPP Cambodian People’s Party MPWT Ministry of Public Works and Transport CR Cambodian riel MTEF Medium-Term Expenditure Framework CSES Cambodia Socio-Economic Survey NDC Nationally Determined Contribution CSO Civil Society Organization NIS National Institute for Statistics D&D Decentralization and Deconcentration NLC National Logistics Council EBA Everything-but-Arms NFP National Forest Programme ECD Early Childhood Development NGO Non-Governmental Organization EIA Environmental Impact Assessments ODA Official Development Assistance ELC Economic Land Concession OOP Out-of-Pocket EU European Union PES Payment Ecosystem Services EVFTA EU-Vietnam Free Trade Agreement PFM Public Financial Management FDI Foreign Direct Investment PIM Public Investment Management FMIS Financial Management Information PPA Paris Peace Agreement System PPP Public-Private Partnership FOB Free on Board PPP Purchasing Power Parity FTA Free Trade Agreement RBS Risk-Based Supervision GCF Gross Capital Formation RGC Royal Government of Cambodia GDP Gross Domestic Product R&D Research and Development GII Global Innovation Index SCADA Supervisory Control and Data Acquisition GMAC Garment Manufacturers Association SCD Systematic Country Diagnostic in Cambodia SDG Service Delivery Grant GNI Gross National Income SDG Sustainable Development Goals G-PSF Government-Private Sector Forum SEA Strategic Environmental Assessment GSP Generalized System of Preferences SEZ Special Economic Zone GVC Global Value Chain STEM Science, Technology, Engineering, and HEF Health Equity Fund Mathematics HEI Higher Education Institution TB Tuberculosis HIV/AIDS Human Immunodeficiency Virus/ TFP Total Factor Productivity Acquired Immune Deficiency Syndrome TVET Technical and Vocational Education HR Human Resource and Training IDP Industrial Development Policy UN United Nations IFRS International Financial Reporting UNTAC United Nations Transitional Authority Abbreviations Standards in Cambodia IWRM Integrated Water Resources US United States Management USD United States Dollar KHR Cambodian Riel VAT Value-Added Tax kWh Kilowatt Hour WTO World Trade Organization 8 Currency Equivalents Exchange Rate Effective as of January 27, 2017 Currency Unit = KHR (Cambodian Riel) KHR 4083.30 = USD 1.00 Fiscal Year = October to September IBRD IFC MIGA Regional Vice President Victoria Kwakwa Dimitris Tsitsiragos; Keiko Honda Nena Stoiljkovic (EVP&CEO) Director Ulrich Zachau Vivek Pathak Merli Baroudi Task Team Leader Miguel E. Sanchez Daniel Street Paul Barbour Obert Pimhidzai Sarak Duong CAMBODIA: Sustaining strong growth for the benefit of all 9 Acknowledgements This report is the product of work by a multi-sector Manager, IFC), Mathew Verghis (Practice Manager, World Bank Group team led by Obert Pimhidzai, MFM), Salman Zaidi (Practice Manager, Poverty), Miguel Eduardo Sánchez Martín, and Daniel Street Sudhir Shetty (Chief Economist), Shabih Ali Mohib (Task Team Leaders). Inguna Dobraja (Country (Program Leader), Lou Scura (Program Leader), and Manager) and Sarak Duong (Cambodia IFC Head) Lars Sondergaard (Program Leader). provided close support and advice to the team, as well as leadership during the consultations. Peer reviewers for the report were Gabriel The report benefits from the much-appreciated Demombynes (Program Leader) and Stephane contribution of Minna Hahn Tong (Consultant) Guimbert (Manager). and Maria Dumpert (Consultant) in drafting and editing. The team also received valuable feedback on preliminary findings and messages at nine meetings The report draws on the main building blocks (held in Phnom Penh, Sihanoukville, Siem Reap, and of growth and competitiveness (Kazi Matin, Kratie). Many thanks to the 375 stakeholders who Guillermo Arenas, Theepakorn Jithitikulchai, participated in those meetings and provided their Dilaka Lathapipat, Miguel Sánchez), poverty and thoughts and suggestions on the storyline and inclusion (Obert Pimhidzai and Kimsun Tong, proposed priorities. with contributions from numerous colleagues), gender and social sustainability (Erik Caldwell, Consultations and postcard interventions were Theepakorn Jithitikulchai), and natural resources organized thanks to the ideas and active involvement (Maria Dumpert and Tijen Arin, with contributions of our communications team, consisting of Leonora from a large number of colleagues). Following the Aquino Gonzales, Saroeun Bou, Sophinith Sam Oeun, Concept Note, additional background notes on firm Ben Alex Manser, and Kanitha Kongrukgreatiyos, as performance and FDI (Asya Akhlaque), governance well as Elise Vanormelingen (Consultant). (Sokbunthoeun So), ICT (Seda Pahlavooni), innovation (Smita Kuriakose, Antoine Coste), skills Excellent organizational administrative assistance (Une Lee, Sanda Liepina), statistical capacity (Junhe was provided by Amara Khiev. The team is also Yang, Mustafa Dinc), tourism (Wouter Schalken), grateful to Chanchamrong Ly (IT) and the entire transport (Genie Jensen), and urbanization (Judy Administrative and Client Support team—Narya Baker, Natsuko Kikutake) were prepared. In addition, Ou, Vanna Pol, Da Lin, Rom Daneth, Kunthea Kea, Theepakorn Jithitikulchai and Dilaka Lathapipat co- Lyden Kong, China Chhun, Phalla Yin, Ravan Chieap, authored a background paper on long-term growth Linna Ky—for their extraordinary support during projections that is expected to serve as input to the engagement meetings with stakeholders. preparation of Cambodia Vision 2050. Acknowledgements Finally, the team benefited from the guidance and The team is grateful for the overall guidance insights of a technical RGC counterpart working provided by Ulrich Zachau (Country Director), group at the Ministry of Economy and Finance, Vivek Pathak (Director, IFC), Xiaoqing Yu (Director, headed by H.E. Vongsey Vissoth, H.E. Hem Vanndy, Strategy and Operation), Kyle F. Kelhofer (Senior and Vanarith Chheang. 10 Table 1. Cambodia SCD team members Global Practice/Topic Focal Points Agriculture Steve Jaffee, Mudita Chamroeun Climate Change, Environment, and Miguel Angel Jorge, Timothy Bouley, Michael McCormick, Tijen Arin, Natural Resources Maria Dumpert, Robert Reid Education Simeth Ben, Tsuyoshi Fukao Energy and Extractives Xiaoping Wang, Sunil Khosla Finance and Markets Ratchada Anantavrasilpa, Colleen Mascenik Gender and LGBTI Erik Caldwell Johnson, Pamornrat Tansanguanwong, Theepakorn Jithitikulchai, Elizaveta Perova, Hillary Johnson Governance Leah April, Sokbunthoeun So Health, Nutrition, and Population Somil Nagpal, Anne Marie Provo, Tomo Morimoto IFC Daniel Street, Sarak Duong Innovation Smita Kuriakose, Antoine Coste Jobs and Skills Dilaka Lathapipat, Theepakorn Jithitikulchai, Une J. Lee, Sanda Liepina Macroeconomics and Fiscal Miguel Eduardo Sanchez Martin, Kazi Matin, Sodeth Ly Management Poverty Obert Pimhidzai, Kimsun Tong, Carolina Mantilla Social Protection and Labor Pablo Acosta, Claudia Zambra CAMBODIA: Sustaining strong growth for the benefit of all Social, Urban, Rural, and Resilience Mika Torhonen, Judy Baker, Natsuko Kikutake, Henrike Brecht Statistical Capacity Junhe Yang, Mustafa Dinc Trade and Competitiveness Lan Van Nguyen, Guillermo Arenas, Wouter Schalken, George Clark, Asya Akhlaque, Yifan Wei, Wim Douw Transport and ICT Seda Pahlavooni, Genie Jensen, Veasna Bun, Naomi Halewood Water and Sanitation Joop Stoutjesdjik, Virak Chan, Phyrum Kov, Greg Browder 11 Executive Summary Over the past two decades, performers such as Vietnam (15.5) and Bangladesh Cambodia has achieved stellar (15.3). Agriculture and, more recently, construction and real estate have also been main engines of economic growth and poverty strong economic growth. As a result, gross national reduction income (GNI) per capita more than tripled from USD 300 in 1994 to an estimated USD 1,070 in 2015, the Thanks to rapid and sustained growth, year in which Cambodia became a lower middle- Cambodia has become one of the world’s income economy (Ly, 2016a). Cambodia’s impressive leaders in poverty reduction and shared achievements have been built upon openness to prosperity. Official estimates show that poverty trade and capital flows and driven by preferential incidence under the national poverty line fell from trade treatment and large official development 47.8 percent in 2007 to 13.5 percent in 2014, a trend assistance (ODA) and foreign direct investment (FDI) supported by improvements in other indicators of inflows (7.9 percent of GDP on average in 2005-15, living standards such as asset ownership, housing among the highest in the world). amenities, and human development outcomes. Poverty reduction was particularly dramatic during To a large extent, Cambodia’s success has the 2007-9 period, when poverty declined by 25 ridden on employment creation. Over the past percentage points and 3.3 million people escaped two decades, the increase in raw labor input alone poverty, thanks in large part to an expansion of accounted for more than one-quarter of aggregate cultivated area and high international food prices output (or real GDP) growth in Cambodia. With its which benefited both farmers and agriculture growing working-age population, Cambodia is still workers. As commodity prices started to decline in the early phases of its “demographic dividend” and and agriculture slowed down (2012 onwards), has so far been extremely successful in creating jobs rural households have diversified their livelihoods, for youth and women in labor-intensive activities. tapping into a growing rural non-farm economy The country has benefited from a large structural and remittances from an increasing number of transformation--—meaning the reallocation of domestic and international migrants. Overall, economic activity across the three broad sectors consumption per capita for the poorest 40 percent of agriculture, manufacturing, and services—with of the population grew by 7.8 percent per annum around 3.6 million net jobs created in industry and on average during 2007-14, putting Cambodia services and 0.7 million in agriculture and fisheries among the top ten countries in the world and over the past two decades. helping to reduce income inequality. Growth has also been driven by the country’s Cambodia sustained an average growth rate of rich and diverse natural capital, which supports Executive Summary 7.6 percent in 1994-2015, ranking sixth in the the livelihoods of millions of Cambodians. world, and has now become a lower middle- Agriculture, which depends heavily on natural income economy. Growth has been driven by resources and ecosystem services, contributed exports of goods and services (mainly garments and to 30 percent of gross domestic product (GDP) tourism), which grew by a blistering 19.6 percent in 2015. More than five million people depend a year, with Cambodia ranking second in the on agriculture and fisheries to supplement their world after Equatorial Guinea and ahead of stellar income and support their food security, and 88 12 percent of the population still relies on traditional In the face of declining competitiveness, biomass for cooking. Cambodians are also the Cambodia’s low-value production and heavy largest consumers of freshwater fish per capita, concentration in garments and tourism will with fish and other aquatic resources contributing become increasingly problematic. Cambodia’s 37 percent of total protein. Tourism, another engine export-led growth has been driven by garments, of economic growth, is also becoming increasingly which comprise more than 70 percent of total dependent on natural resources and environmental merchandise exports. Most of Cambodia’s garment sustainability. export items are targeted to the low-quality/low- price segment of the U.S. and EU markets. Only in As a lower middle-income economy, recent years have some garment factories started Cambodia is facing new challenges to move toward higher value addition (embroidery, washing, printing), likely spurred by declining to sustaining strong economic growth external competitiveness in the context of U.S. dollar appreciation and the rapidly rising minimum wage Going forward, Cambodia may not be able to rely (from USD 80 a month in 2013 to USD 153 a month on the same factors that drove strong growth and in 2017, now on par with Vietnam). While some poverty reduction over the past two decades. nascent higher-value export products (including Cambodia’s eventual graduation from being a least- bicycles, television parts, and ignition wires) have developed country (LDC) will bring a progressive been observed in recent years, most of the activities decline in donor financing and an erosion of located in Cambodia are still mainly labor-intensive preferential trade treatment. At the same time, assembly, with little to no production of pieces salaries are rising, and it will be increasingly difficult and parts and with only incipient integration into for Cambodia to keep exporting unprocessed rice regional value chains. Tourism is also coping with and low-end garments. In the case of agriculture, U.S. dollar appreciation and rising wages, and the outlook for commodity prices is not positive, and challenges in infrastructure and environmental Cambodia’s scope for further gains in cultivated area sustainability constrain diversification of activities is more limited nowadays, especially considering within the sector. With tourism accounting for the need for environmental sustainability. 70 percent of the total, diversification in service CAMBODIA: Sustaining strong growth for the benefit of all exports remains limited, and future prospects may Notably, labor productivity gains have been be hampered by limited adoption of technologies. lower than in other rapidly growing economies, partly due to lower capital intensity. During 1993- A number of institutional, human capital, and, to 2014, Cambodia registered 3.5 percent growth in a lesser extent, infrastructure constraints hamper labor productivity compared to the 4.7 percent competitiveness as well as the creation of a achieved by Vietnam during the same period and vibrant private sector in Cambodia. While some the 7.1 percent average growth rate in Thailand progress has been made, Cambodia still lags behind during the boom years of 1986-96. Productivity in other lower middle-income economies in these areas the garment industry remains lower than in most (Figure 1). Burdensome formalization processes comparator countries, and evidence indicates make Cambodia one of the most difficult places in relatively little investment in equipment and the world to register a business—Cambodia ranks machinery upgrading. Gross capital formation as a 180th out of 189 countries on this dimension, with percentage of GDP averaged less than 20 percent 87 days needed to start a business (compared to 25.9 of GDP over the past two decades, lower than in East Asia and the Pacific) and high costs in terms comparator countries and much lower than Vietnam of income per capita (78.7 percent). Low educational and Thailand during boom years. attainment also poses an increasing constraint to 13 economic diversification and upgrading: although Figure 1. Cambodia still lags behind on some net enrollment in primary education increased dimensions of economic competitiveness significantly, lower secondary completion rates (43 percent in 2013) are significantly below the average Institutions for lower middle-income economies (71 percent). 7 Innovation 6 Infrastructure Entrepreneurs report that school credentials 5 Business 4 Macroeconomic (certificates, degrees), even at the tertiary education sophistication 3 environment level, are not a signal of competence of workers, 2 1 Health Market 0 and primary pointing to quality challenges. Moreover, technical size education and vocational education and training (TVET) faces negative perceptions (which results in low Technological Higher education readiness and training enrollment rates) and does not seem to address Financial market Goods market the skills demand of the private sector. In terms of development Labor market efficiency infrastructure, although Cambodia’s power sector efficiency supply has improved significantly in the past five Cambodia 2015 Cambodia 2006-07 years, the price of electricity remains high compared Lower-MIC 2015 ASEAN-5 2015 to neighboring countries: the average tariff for large Source: Global Competitiveness Indicators, World Economic Forum. industrial consumers was at least 35 percent higher than in Thailand, Myanmar, or Vietnam. absence of early stimulation. Having grown up in To ensure that growth will continue a period of very high poverty and maternal and child undernutrition, the majority of Cambodia’s current to be inclusive, a series of constraints cohort of young workers likely experiences some of that particularly affect poorer the lifelong, negative consequences of childhood households must be overcome malnutrition and other early life deprivations. Although malnutrition prevalence has declined Limited human capital hinders socioeconomic over the past two decades, about 33 percent of mobility. Most Cambodians not in extreme poverty children under the age of five are stunted. Over half are by international standards either moderately of children 6-59 months of age have late schooling, poor or economically vulnerable, with two-thirds and only 35.9 percent of 3-5 year olds were enrolled of the population living under USD 5.50 a day PPP. in early childhood education during the 2014- The slow growth of an economically secure (and 15 academic year. Access to improved water and consumer) class in Cambodia can be explained in sanitation facilities (at 75 and 42 percent of total part by low household endowments in terms of population, respectively) remains significantly education, health, and land. A national assessment below the average for lower middle-income of student achievement (MoEYS, 2015) found that economies (90 and 52 percent, respectively) and 39 percent of grade 6 pupils had a below basic is a major contributor to stunting, along with sub- proficiency rating for reading in Khmer. Such poor optimal infant feeding practices and low dietary Executive Summary learning outcomes—which can be attributed to diversity. In addition, Cambodia still has one of the fewer and inadequately trained teachers and fewer highest maternal mortality rates in the region (161 hours compared to peers—affect the ability of per 100,000 live births in 2015), which points to individuals to climb the socioeconomic ladder. problems in quality and access to healthcare. Human capital limitations begin early in life due Socioeconomic mobility is also hampered by high to poor nutrition, lack of nurturing care, and exposure to financial and weather shocks, with 14 very limited social protection to help households among college graduates, which underscores the manage shocks. Approximately 6.3 percent of the importance of closing the educational attainment population had catastrophic spending in 2013, gap. Analysis also shows that female-headed and 3.1 percent had to incur debt to pay for health households are more likely to rely on remittances, expenditures. Cambodia ranks among the world’s less likely to save, and more vulnerable to natural top ten countries in terms of out-of-pocket (OOP) and health shocks. Notably, women in Cambodia health spending, with OOP payments for health also face difficult tradeoffs between childcare and services at 60 percent of all health expenditure. work, particularly since they dominate employment While the expansion of health equity funds (HEF) in the garment sector, where 97 percent of workers could help increase utilization of public health moved to Phnom Penh for their job (World Bank, services and lower OOP expenditures among the 2015d). In terms of political representation, women poor and vulnerable, coverage is still limited, and account for only 7 percent of ministerial posts, challenges in design and implementation remain. placing Cambodia in the bottom 20 percent globally Disasters are another source of catastrophic (Inter-Parliamentary Union, 2016). spending, with Cambodia ranked as the 8th most disaster-prone country in the world in 2015 by the Consultations with civil society organizations United Nation’s World Risk Index. A 2013 post-flood (CSOs) highlighted that some population needs assessment found that the average monthly groups still experience marginalization and incomes of those affected dropped more than 25 exclusion, heightening their vulnerability and percent, amounting to USD 37.6 million. Meanwhile, preventing them from sharing the benefits of social protection systems are only incipient, with growth. For example, approximately 10 percent Cambodia spending less than 0.1 percent of GDP on of the population suffers from at least one form social assistance compared to the world average of of disability. About 45 percent of adults with 1.6 percent.1 disabilities do not earn an income, and household wealth for people with disabilities is about half Persistent gender gaps in earnings and job that of non-disabled people. People who are quality also pose a challenge to achieving lesbian, gay, bisexual, transgender, and/or intersex shared prosperity. Female labor force participation (LGBTI) continue to face stigmatization by their CAMBODIA: Sustaining strong growth for the benefit of all in Cambodia, at 79 percent in 2014, is among families, communities, and the media, along with the highest in the world, and female-owned discrimination in workplaces and schools. Although enterprises comprise more than half of all business ethnic minorities do not have significantly higher establishments in Cambodia. However, female- poverty rates than the average, they are highly owned businesses are generally smaller, less vulnerable to the loss of land. In 2007, it was profitable, and less likely to be registered than estimated that indigenous communities had lost male-owned businesses. While women represent 30 percent of their traditional land since 1989, 85 percent of the garment sector labor force, most and conflict over land remains one of the most of them are engaged in assembly, while the higher- contentious issues in the country. paying quality and supervision work is done by men. Morever, according to the Cambodia Socio- While not preventing strong growth and poverty Economic Survey (CSES) 2014, the gender earnings reduction thus far, governance challenges affect gap in 2014 was as high as 30 percent among those firm competitiveness, the quality of public service with low education, notably dropping to 7 percent delivery, and access to assets and opportunities. While some progress has been made, bribery incidence (affecting 63 percent of reporting firms 1  ASPIRE database. Accessible at datatopics.worldbank.org/ aspire/. in 2016) remains by far the highest among peer 15 countries. In the 2015 Corruption Perceptions Index, (MFI) is also booming, growing at annual rates of Cambodia ranked 150th, with only Afghanistan over 40 percent in recent years, and outstanding and North Korea performing worse in the Asia- MFI loans reached 12 percent of GDP in 2014. In a Pacific region. While government spending on decade, average loan sizes have increased from health and education has increased significantly in around USD 200 to USD 1,000, doubling the pace recent years (at around 1.3 and 2.1 percent of GDP of expansion of income per capita in 2004-14. A in 2015, respectively), it remains below average for series of macroprudential measures introduced by a lower middle-income economy, and overreliance the National Bank of Cambodia in 2016 and 2017, on donors for public service delivery persists. including rising liquidity and capital requirements, This problem is compounded by fundamental are expected to help mitigate risks related to fast weaknesses in public finance management (RGC, credit growth. 2015b), patronage, misallocation of human resources, and limited civil service capacity. Finally, Climate change, coupled with natural resource in a context of poor rule of law, land disputes and degradation and unplanned urbanization, could displacement have disproportionately affected the also affect future growth. Natural disasters have poor and vulnerable, although notable progress has caused significant deterioration of livelihoods and been made over the past 15 years. destruction of infrastructure in Cambodia, with average damages from disasters estimated at USD Risks stemming from rapid credit 235 million per year (Germanwatch, 2016). Notably, growth and natural resource Cambodia lacks the infrastructure and planning capacity needed to respond to the hydro variability degradation could affect economic in the country. In the future, climate change will sustainability heighten the vulnerability to natural disasters and extreme weather events: based on the scenario of Compounding the above challenges, a number a 2°C temperature rise by 2050, initial estimates of rising risks could potentially affect Cambodia’s suggest that climate change will reduce Cambodia’s development path, including increasing total GDP by at least 1.5 percent in 2030 and 3.5 exposure to microfinance debt and financial percent in 2050 (RGC, 2015a). Compounding overheating. Although Cambodia presents low risk climate change-associated risks, Cambodia’s natural of debt distress (IMF, 2016), a programmed fourfold capital is being degraded rapidly by unsustainable increase in the public sector wage (between 2013 economic activities. According to official estimates, and 2018) may eventually result in fiscal pressures, forest cover declined by 21 percent between since the public payroll already represents around 2006 and 2014, and approximately 45 percent of 40 percent of revenue. In terms of macro-financial the country’s original, natural wetland area has risks, Cambodia’s credit to private sector as a been lost. Such losses have wide-ranging impacts, percentage of GDP is booming and jumped from 2 including on the productivity of the agricultural percent in 1993 to 63 percent in 2015, already above and fisheries sectors, hydropower generation, and the average for lower middle-income economies. tourism assets. In addition, negative externalities Executive Summary Following a sharp decline in construction activity from urbanization could hamper economic growth. in the aftermath of the 2009 global crisis, credit Although urbanization in Cambodia is still in its to construction, real estate, and mortgages early stages, average population density in urban increased from around 4 percent of GDP in 2010 areas (8,500 people per square kilometer in 2010) is to an estimated 13 percent of GDP as of 2015, or already higher than in Vietnam or China, and a large around 20 percent of total outstanding credit to the percentage of the population lives in urban poor private sector. Credit at microfinance institutions settlements. 16 In light of these challenges, a set of blocks for sustained growth and increased income- ten priority areas for development generating capacity of households. “Moderate priority” areas include those actions that may not has been identified yet address the most significant constraints but have consequential implications in the long term or Based on in-depth analysis and extensive those that have high but localized impacts. Some consultations, this Systematic Country Diagnostic selected policy options in each of the ten areas are (SCD) identified some key areas of development also shown in Table 2. for ensuring strong, inclusive, and sustainable growth going forward. Identification of the priority The first pathway involves enhancing export interventions involved a two-step process.2 First, competitiveness and economic diversification in-depth analytical work and a literature review, to sustain strong growth and create jobs. At together with an extensive consultation process, a time when companies are facing declining informed the selection of ten development areas for competitiveness due to U.S. dollar appreciation, action. Second, following consultations, a two-tier the most pressing need is to reduce the costs of methodology was applied to assess the constraints firm establishment and operation by improving the to growth and asset accumulation and to identify business environment, reducing informal fees, and the most pressing priorities within those ten areas bringing down electricity costs and trade transaction for development (Table 2). Interventions in the costs. These interventions could be complemented identified areas for development contribute to by a series of measures aimed at boosting three different “pathways” or avenues for achieving infrastructure and mechanization to facilitate the twin goals of poverty reduction and shared value addition and economic diversification: prosperity in Cambodia. These pathways would also introducing a framework for public investment benefit from cross-cutting public administration and and asset management, streamlining existing tax public finance reforms to strengthen the capacity of incentives, supporting the development of capital the public sector. markets, and cooperating with the financial sector to foster domestic savings. It will also be critically The areas for development were ranked based important to ensure macro-financial resilience to on (i) their impact in creating and enhancing CAMBODIA: Sustaining strong growth for the benefit of all mitigate the risks from strong credit growth while households’ participation in better economic increasing financial inclusion, which would involve opportunities, (ii) the share of population introducing Risk-Based Supervision in the financial affected, and (iii) complementarity with other sector, enhancing data quality and oversight, interventions. The areas for development supporting crisis preparedness, and establishing identified as “highest priority” have the largest a financial safety net. At the same time, given the impact on the twin goals in terms of boosting firms’ continued importance of the agricultural sector to ability to create more productive jobs, sustaining growth and poverty reduction, Cambodia will need growth, and raising household income. “High to foster a gradual transformation of the sector priority” areas have a moderate immediate direct through intensification, diversification, and value impact on the twin goals but form the building addition. The public sector could facilitate expanded irrigation, knowledge and technology adoption in 2  Extensive engagement with key stakeholders (government, collaboration with the private sector, and strategies civil society, private sector, development partners, academia, and the National Assembly) comprised nine meetings held of quality differentiation by enhancing systems for in four different regions of the country. Participants provided managing quality and food safety and introducing feedback on the key development opportunities for achieving an overall coherent approach to ‘brand’ Cambodian poverty reduction and inclusive growth in a sustainable manner in Cambodia. food and agriculture. 17 Table 2. Cambodia SCD pathways and identified priority areas for development Pathway Area for development Priority Selected policy options in this area i. Increasing 1. Reducing the costs of Highest Task force to Establish a National economic firm establishment and improve business Single Window for competitiveness operation (including business environment and trade facilitation and environment, informal fees, curb informal fees diversification to trade facilitation, electricity sustain strong costs) growth and create jobs 2. Boosting public and High Pass a PIM Sub- Develop an private investment in decree and develop internal bond infrastructure and machinery manuals and market (including acquisition while developing procedures sovereign and capital markets private) 3. Strengthening regulation Moderate Introduce a Risk- Enhance crisis and supervision of the Based Supervision preparedness, financial sector to mitigate approach establish a financial risks from strong credit safety net growth, while building further financial inclusion 4. Fostering agricultural High Facilitate knowledge Strengthen systems modernization in the and technology and stakeholder aftermath of the commodity adoption throughout capacities to price boom the value chain (via manage product PPPs, incubators, quality, food safety pluralistic extension) and risks ii. Building 5. Endowing people with Highest Implement the Improve human assets skills by boosting attainment Lower Secondary accreditation and to facilitate and learning outcomes School Effectiveness quality assurance economic of secondary and higher Standards mechanisms in mobility and education higher education shared prosperity and TVET 6. Investing in the early High Implement the Fast Expand access years (nutrition, pre-primary Track Road Map for to opportunities education) Improving Nutrition for early learning and stimulation through community centers 7. Protecting households Moderate Expand Health Strengthen from shocks (OOP in health, Equity Funds to other the ID Poor DRM, social protection) vulnerable groups targeting system and establish conditional cash transfers Executive Summary 18 Table 2. continued Pathway Area for development Priority Selected policy options in this area iii. Ensuring 8. Maintaining and High Adopt an integrated Improve a sustainable developing natural capital, approach to sustainable growth pattern while strengthening climate natural resource management and by investing in resilience management in the conservation in natural capital, Cardamom and Tonlé protected areas climate resilience Sap and forests and urban development 9. Promoting competitive, Moderate Implement an Develop a sustainable, and inclusive integrated urban centralized cities through integrated planning agenda sanitation network urban planning and solid and liquid waste management solutions iv. Cross-cutting 10. Public administration and High Upgrade Enhance citizen public financial management human resource feedback reforms for improved service management mechanisms to delivery systems and improve public introduce service delivery performance monitoring Source: World Bank staff analysis in consultation with stakeholders. The second pathway focuses on building human be combined with promotion of early childhood assets to foster economic mobility and shared education; improvements in households’ water prosperity. Analysis shows that human capital supply and sanitation, increased availability and is the most valuable asset for escaping poverty affordability of nutritious diets, and social protection and vulnerability in Cambodia: about 76 percent policies and programs to support families in caring CAMBODIA: Sustaining strong growth for the benefit of all of household members in the most economically for young children. Measures aimed at fostering secure group have at least lower secondary mobility should be complemented with others aimed education, compared to just 17 percent among at mitigating shocks and building resilience to help the least successful group, and the probability shield household income and prevent households of having a wage job is much greater for people from falling into poverty, such as expanding the with secondary education and above. To reap the HEFs to increase coverage of vulnerable groups demographic dividend and meet increasing demand and reduce their health OOP expenditure, refining by entrepreneurs for skilled workers, Cambodia the ID Poor targeting mechanism and introducing needs to introduce measures to improve learning conditional cash transfers (CCTs), and consolidating outcomes significantly and foster attainment current pension schemes. in secondary education, higher education, and TVET/skills training. Addressing the high degree The third pathway aims to ensure the sustainability of malnutrition and stunting will also be critical to of growth by investing in Cambodia’s natural building human capital. Evidence-based nutrition- capital and sustainable urban development, specific interventions to be applied in Cambodia while strengthening climate resilience. Given could include fortification, supplementation, and the interlinkages between natural resource-based behavior change communication, which could ideally ecosystems and man-made urban environments, 19 addressing these challenges requires spatially assessments (SEAs), strengthening co-management integrated planning, management, and investment across different sectors, implementing the new approaches. For natural resources, this means taking policy on conservation corridors, implementing the into account natural challenges and trade-offs related planning provisions in the current Water Resources to modernizing agriculture, improving fisheries, Law, and improving land use rights. In addition, expanding sustainable tourism, and developing support is needed for institutional reform and hydropower within a specified landscape, in targeted investments in urban sanitation, transport, coordination with managing and restoring degraded and upgrading of urban poor settlements. forests and aquatic ecosystems and strengthening resilience to climate change and natural disasters. Finally, all the areas for development and For urban planning, this means developing a long- policy options identified in the SCD depend on term strategy for implementing reforms across significantly improving public sector capacity various urban sectors (including water, sanitation, for reform implementation and service delivery. transport, and disaster risk management) in a Ultimately, the success of all these interventions specified city, covering its central urban areas, urban rests on improving the quality of public service poor settlements, and peri-urban areas. In support delivery. Cambodia has initiated its decentralization of this integrated approach, a series of additional and deconcentration reform, and the redefinition institutional measures and investments are needed of new roles and responsibilities needs to be to strengthen the implementation of existing accompanied by enhanced allocation and use of national-level reforms, plans, and programs. These public resources (public financial management include developing targeted public expenditure reform) and human resources (public administration programs to address gaps in financing (including at reform) and complemented with strengthened civil the local level), conducting environmental impact servant performance monitoring and enhanced assessments (EIAs) and strategic environmental citizen feedback mechanisms. Executive Summary 20 Chapter 1 Introduction Thanks to rapid and sustained growth, Cambodia progress on the non-income dimensions of has become one of the world’s leaders in poverty poverty (Leo and Barmeier, 2010). In particular, reduction and shared prosperity. Driven by strong significant progress has been made in increasing economic growth and high agricultural commodity primary education enrollment, combating HIV/ prices, poverty incidence declined from 47.8 percent AIDS, and reducing child and maternal mortality in 2007 to 13.5 percent in 2014, according to official rates (from 117.3 in 1990 to 28.7 per 1,000 live estimates. During this time, the average growth of births in 2015).4 Access to improved sanitation and mean consumption per capita for the poorest 40 drinking water has also increased substantially, percent of the population was around 7.9 percent, with national-level MDG targets met (Table 17 in putting Cambodia among the top ten countries in Annex 1). Although further progress is still needed the world and helping to reduce income inequality. in some areas as discussed in Box 1, Cambodia is The employment-to-population ratio (82 percent looking toward attaining the next set of goals, the in 2014) and female labor force participation ratio Sustainable Development Goals (SDGs), by 2030, (79 percent in 2014) are also among the highest in as well as graduating from least developed country the world, partly thanks to the emergence of the (LDC) status by the 2020s. garment industry. With an average annual growth rate of 7.6 percent In addition to reducing absolute poverty over the past two decades, Cambodia is ready to incidence dramatically,3 Cambodia—considered join the “Olympians of growth.” Cambodia ranked to be one of the Millennium Development Goal sixth among the most rapidly growing economies (MDG) “trailblazers”—has made substantial in the world in 1994-2015, ahead of Vietnam and CHAPTER 1: Introduction almost all others. Cambodia is expected to join the “Olympians of growth,” a group of 13 economies in 3  Based on the USD 1.25 per day international extreme the world that have grown at an average rate of more poverty line set for the MDGs, the proportion of Cambodians living below the poverty line declined from 32.8 percent in than 7 percent a year for 25 years or longer (Ly and 2004 to 10.1 percent in 2011. Using the new USD 1.90 per Aldaz-Carroll, 2014). Gross national income (GNI) per day poverty line set in 2015 to reflect changes in the cost of living over time, extreme poverty incidence declined from 31.9 percent in 2004 to 8.9 percent in 2011 and 6.2 percent in 2012. 4  See the Annex 1 for more details. 22 Introduction Box 1: MDG attainment and LDC graduation criteria Overall, Cambodia has made significant progress in achieving the Millennium Development Goals (MDGs). The country has more than halved extreme poverty (from 33 percent in 2004 to 10 percent in 2011), more than halved maternal mortality (from 1,020 per 100,000 live births in 1990 to 161 in 2015), reduced child mortality (from 117 per 1,000 in 1990 to 28 in 2015), increased the primary education enrollment rate (from 92.1 percent in 2000 to near-universal enrollment of 94.7 percent in 2014), made significant progress in combating HIV/AIDS (with the incidence rate declining from 0.08 per 100 people in 2001 to 0.01 in 2013), nearly achieved gender parity in primary and secondary education, and improved access to safe water and sanitation (see Annex 1 for more details). Cambodia mainstreamed the MDGs into its national strategic development plans, and the Sustainable Development Goals (SDGs) are expected to enjoy the same level of ownership by the government. However, achievements are mixed for a number of MDGs, including tuberculosis (TB), environmental sustainability, demining, and gender equality. TB incidence and death rates remain high. Although the pace of deforestation has slowed down slightly thanks to recent policy changes, it has remained high over the past two decades. Similarly, although the percentage of contaminated land cleared of unexploded ordinances has increased to 45 percent, it still falls far short of the target of 100 percent. Cambodia also needs to improve the roles of women in employment and political participation. Moreover, Cambodia’s gains in poverty reduction remain highly precarious, as most households that escaped poverty did so by only a small margin. In 2012, it was estimated that a small negative shock of USD 0.30 per day would cause the national poverty rate to increase to 40 percent, or approximately six million people (World Bank, 2015). In terms of development status, Cambodia has become a lower middle-income economy according to the World Bank classification system but remains a least developed country (LDC) according to the United Nations (UN). At the 2015 review, Cambodia was found ineligible for graduation from LDC status. While the threshold has been met for the Human Assets Index, economic vulnerability remains high, and income per capita is still below the threshold (Table 3). Cambodia aims to become eligible for LDC graduation by 2024. LDC graduation is expected to imply the CAMBODIA: Sustaining strong growth for the benefit of all phasing out of preferential treatment by donors. For example, after Cambodia meets the LDC graduation criteria in two consecutive triennial reviews, the European Union (EU) will initiate a three-year process for phasing out its Everything-but-Arms Agreement with Cambodia. Table 3: Cambodia’s scores on LDC graduation criteria Threshold Cambodia Threshold Cambodia GNI per capita >USD 1,242 USD 1,070 Economic Vulnerability Index <32 38.3 Human Assets Index >66 67.2 Exposure index 34.3 Undernourishment 81.5 Economic structure 42.5 Under-5 mortality 83.1 Shock index 42.2 Literacy rate 65.2 Natural shocks 63.2 Source: United Nations, Development Policy and Analysis Division (2015). 23 capita more than tripled from USD 300 in 1994 to preparation of Cambodia Vision 2050, signal an estimated USD 1,070 in 2015, the year in which the commitment of the Royal Government of Cambodia became a lower middle-income economy Cambodia (RGC) to overcome existing and emerging (Ly, 2016a). Growth has been driven by garment development challenges. The SCD is expected to help exports, agriculture, tourism, and, more recently, Cambodia define strategic development priorities construction and real estate. for addressing the key challenges going forward. However, going forward, Cambodia may not The SCD is structured around a series of questions be able to rely on the same factors that drove that focus on understanding the drivers of strong growth and poverty reduction over the growth and poverty reduction in Cambodia and past two decades. Land expansion and rising identifying pathways for ensuring strong, shared, agricultural prices have been the most significant and sustainable growth in the future. These contributors to poverty reduction thus far. However, questions are: the outlook for commodity prices is not positive, and Cambodia’s scope for further gains in cultivated i. What were the drivers of Cambodia’s fast and area is limited, especially considering the need for robust growth and poverty reduction over the environmental sustainability. On the growth side, past two decades? and with Cambodia’s eventual graduation from least- ii. What factors need to be in place to sustain strong developed country status, a progressive decline economic growth and enhance equity outcomes in donor financing and an erosion of preferential in the next decade and beyond? trade treatment are expected. Export diversification iii. How sustainable is the current development coupled with household economic mobility and model, and what potential risks threaten job creation are seen as the avenues to promoting Cambodia’s development trajectory and require sustained economic growth with shared prosperity mitigation? going forward, but significant challenges and risks iv. Based on the above, what are the key pathways lie ahead. and development areas for action to attain strong sustainable growth and poverty reduction This Systematic Country Diagnostic (SCD) aims in Cambodia going forward? to help Cambodia achieve its development aspirations by identifying pathways for For greater clarity and specificity, discussion of addressing the key challenges that remain. The governance issues is presented in the various parts objective of the SCD is to help Cambodia, the World of the SCD as relevant, including discussion of Bank Group (WBG), and other partners identify control of corruption (in relation to firm operating key priority areas for further progress in sustaining costs), rule of law (land issues, environmental strong growth in a sustainable manner, reducing impact assessments), public service delivery (social poverty and promoting shared prosperity. The sectors), and government effectiveness (public analysis presented is not limited to areas or sectors finances). where the WBG is currently active but rather focuses CHAPTER 1: Introduction on the country’s key development challenges and The SCD tries to answer these questions based remaining constraints. on analysis to date. The SCD draws from analyses on sources of growth, labor market, trade outcomes, This SCD comes at an opportune time when gender gaps, firm performance, and innovation its policy impact is likely to be maximized. The that were specifically commissioned for this SCD; a approval in 2015 of a new Industrial Development literature review presented in a separate document; Policy for 2015-25, together with the upcoming and written inputs from World Bank specialists 24 Introduction in different areas (back to Table 1). A country look at the drivers of Cambodia’s stellar growth and benchmarking exercise was also conducted (see poverty reduction performance over the past couple Annex 1), and throughout the document, Cambodia decades. A series of challenges and risks to Cambodia’s is compared to a number of structural peers (Box 2). growth and its inclusiveness and sustainability going forward are then discussed. Based on this analysis as This SCD is organized as follows. It begins with well as inputs from consultations with government an overview of the country context, describing and other stakeholders, some key priority areas for Cambodia’s development trajectory and recovery ensuring strong, inclusive, and sustainable growth in from its devastating civil conflict. It then takes a closer Cambodia are proposed. Box 2: Proposed peer selection criteria This SCD benchmarks Cambodia vis-à-vis countries with the same lower middle-income classification, a set of structurally similar countries (“structural peers”), as well as other ASEAN economies (Thailand) for aspirational purposes. Structural peers are countries anywhere in the world that meet five criteria that also define Cambodia: • Lower middle-income countries; • Economies not highly dependent on exports of natural resources (identified by excluding economies for which “natural resource as a share of exports in 2006-12” does not exceed 20 percent); • High exposure to natural disasters (top quintile); • Countries in which the rural population is at least 40 percent of total population; and • Countries that are not classified as islands, small countries, or landlocked. CAMBODIA: Sustaining strong growth for the benefit of all Using these criteria, the structural peers for Cambodia, which recently joined the lower middle-income group (USD 1,070 GNI per capita in 2015 according to the Atlas Method), are: Bangladesh (USD 1,190), Guatemala (USD 3,590), Philippines (USD 3,540), Nicaragua (USD 1,940 per capita), and Vietnam (USD 1,980 per capita). Due to varying data availability, not all the peers are included in all the comparisons. Most of these economies currently have a strong garment industry and relatively low complexity in their exports (Hausman and Hidalgo, 2009), with the exception of the Philippines. Nicaragua and Cambodia also have in common a recent past marked by tragic civil conflict that affected human and economic development. 25 Chapter 2 Context: Cambodia’s development path Cambodia, from conflict to success The 1991 Paris Peace Agreement and the as a highly open export-oriented democratic elections of 1993 signaled a new phase of state-building. Due to geo-political economy… rivalries, the Cambodian conflict dragged on until 1991, following the demise of the Soviet Union. This Cambodia’s achievements are impressive given development resulted in the historic settlement of the country’s devastating civil conflict, which the Cambodian conflict in 1991, known as the Paris left its fragile social, human, institutional, and Peace Agreement (PPA). The PPA permitted the physical capital decimated and required a new United Nations Transitional Authority in Cambodia phase of nation-building. Following its declaration (UNTAC) to organize multi-party elections for a of independence from French colonial rule in Constitutional Assembly in 1993. The Constitutional CHAPTER 2: Context: Cambodia’s development trajectory 1953, and despite its neutrality policy, Cambodia Assembly enacted a new constitution which was soon involved in the Second Indochina War. contained all the necessary elements for liberal Three decades of war and instability, including the democracy such as periodic multi-party elections, oppressive Democratic Kampuchea regime (1975- political and civil liberties, and the mechanisms of 1979), resulted in the loss of 1.7 million people checks and balances. from starvation, overwork, disease, and outright execution (Chandler, 1991). Driven by ultra- Cambodia’s state capacity in the early 1990s nationalist and utopian thought, the Khmer Rouge was typical of other post-conflict countries undertook massive socio-economic engineering, and was marked by insecurity. The physical depopulating urban centers, enslaving the entire infrastructure was in a poor state, and the economy population, and forcing them to engage in intense was characterized by fragmented, unplanned, agricultural activities with heavy workloads and unregulated, and uncoordinated exploitation of little food. When Vietnamese forces toppled the natural resources—particularly from logging— Khmer Rouge in 1979, Cambodia had no semblance geared toward short-term gain (Hall, Hirsch, and Li, of a functioning state, and the population was 2010; Hughes and Un, 2011). For much of the 1990s, demoralized and impoverished. political competition between the two major party leaders saw efforts to strengthen the power base 28 Country Context through political patronage rather than efforts to States to link favorable access to the U.S. market with build the state around a formal and professionalized labor conditions in Cambodian factories (Slocomb bureaucracy (Le Billon, 2010). Such competition 2010), and the enactment of the European Union’s put the coalition government formed by the two Everything-but-Arms (EBA) agreement in 2001— major parties following the 1993 UNTAC-sponsored contributed to the entry of garment manufacturers election in an uneasy position, leading to an armed operating in Southeast Asia into Cambodia (Bargawi, clash in July 1997. Eventually, the consolidation of 2005; Hill and Menon, 2014). In terms of multilateral power under the current ruling party led to a long initiatives, Cambodia joined the Association of period of stability. Southeast Asian Nations (ASEAN) in 1999 and became a member of the WTO in 2004. Over the past two decades, Cambodia has been able to achieve political stability and economic In addition, Cambodia adopted a series of progress. Cambodia has transformed itself from reforms aimed at becoming a highly open a war-torn country to a peaceful one and from a market-oriented economy and fostering private centrally planned and ineffective economy to a sector development. The most notable reform was regionally and globally linked and rapidly growing the adoption of the 1994 law on investment, which economy. The country embraces a democratic allowed 100 percent foreign-owned investment system of government, with elections being held and provided guarantees against nationalization at regular intervals. Economically, political stability and regulation on price. The creation of the Council and the absence of violence facilitated the surge in for the Development of Cambodia (CDC) as a one- economic activity.5 Despite criticism of widespread stop service office for investors also helped channel corruption, the country has achieved sustained foreign investment. This was accompanied by the economic growth. Socially, the fruits of economic enactment of critical regulations, including land, growth have been felt among the Cambodian banking, bankruptcy, and company laws (Kelsall and public with increased poverty reduction and Heng, 2014). Cambodia has also introduced notable general improvement in human development cross-border trade facilitation improvements in indicators, although numerous challenges remain. recent years, resulting in faster export and import Considerable progress has also been made in procedures (Table 16 in Annex 1). Cambodia ranks CAMBODIA: Sustaining strong growth for the benefit of all adopting several national-level policies and among the top 5 percent of economies in the world development action plans, albeit with varying in terms of merchandise trade (imports plus exports), results across sectors. at 144 percent of gross domestic product (GDP) in 2015. Compared to other Southeast Asian countries, Once stability was regained, Cambodia showed a Cambodia is also recognized as having the least strong commitment to economic openness with trade restrictions in services (ASEAN Secretariat and the signature of free trade agreements (FTAs) and World Bank, 2015). accession to the World Trade Organization (WTO). The United States granted Cambodia most favored To a large extent, the development of nation (MFN) status in 1996, which—together global industries has been coordinated with with the Generalized System of Preferences (GSP) stakeholders. For the garment sector, the Garment in 1997, the signature in 1999 of a bilateral textile Manufacturers Association in Cambodia (GMAC) agreement between Cambodia and the United was created by the first group of investors as a vehicle for collectively dialoguing with the RGC. 5  From the viewpoint of some investors, the ability to This body became instrumental to the coordination maintain political stability and reduce violence is a necessary processes of garment production and export, with condition for people to develop entrepreneurial activities (Kelsall and Heng, 2014, p. 29). an official role in garment exports recognized by the 29 RGC to become members of GMAC. The GMAC also to coordinate and seek cooperation from the citizens. represents the manufacturers in policy discussions Rent-seeking activities of public officials continue to as well as during negotiations on wage increases exist but are contained at a level that does not fully demanded by labor unions, resulting in a collective jeopardize economic activities, with some variation minimum wage setting mechanism for the industry. across sectors. In the case of garments, presence of For the broader private sector, the Government- the GMAC, a capable private sector organization, Private Sector Forum (G-PSF) was established and helped create “good enough governance” through supported by “a system of industry specific and collective action and negotiation, which lowers cross-cutting working groups, bringing together transaction costs and facilitates growth in the sector. private-sector representatives and ministerial The GMAC helped sustain support to the industry and officials to solve industry problems” (Kelsall and create a sense of security by playing an intermediary Heng, 2014). role between garment manufacturers and the public sector with its ability to get things done (World Bank, Cambodia’s rapid economic development has 2009a; Ear, 2011). Other industries, such as those for also been fueled by foreign inflows, supported rice milling and food processing more generally, did by a stable exchange rate policy. Despite not not enjoy a similar level of support from a business being a commodity exporter, Cambodia was association to interface with government and among the countries in the world that attracted resolved problems through collective action (World the most foreign direct investment (FDI) during Bank, 2009a). 2005-15 (average of 7.9 percent of GDP annually). Another distinguishing feature of Cambodia’s Cambodia still rates low on citizen engagement in economic development is large aid flows and donor rulemaking, control of corruption, and rule of law presence contributing to development. The relative relative to the ASEAN-5 countries and to other importance of such aid is on the decline, with net lower middle-income countries (L-MICs) (Figure official development assistance (ODA) received as 2). Cambodia ranks 150th out of 167 countries in a percentage of GNI dropping from 12.2 percent in perception of corruption6 and, while declining in 1996 to 5 percent in 2014. Notably, large aid inflows recent years, still has the highest bribery incidence and tourism and export receipts have ultimately led in Southeast Asia.7 Public Sector capacity has CHAPTER 2: Context: Cambodia’s development trajectory to dollarization of the economy. The stable exchange improved but remains uneven across ministries, rate policy with respect to the U.S. dollar, which and progress in the public financial management, provides a nominal anchor for economic agents public administration, legal and judicial, and and underpins stable prices, may have contributed decentralization reforms pursued over the past to FDI attraction by minimizing exchange rate risks decade has been sluggish. This hampers the ability of (World Bank, 2015b). the public sector to address the demands of a vibrant civil society organization (CSO) sector, and the rising … with persistent governance expectations of an increasingly educated citizenry. challenges… Although Cambodia’s current political system is based on the principles of democracy, weak Cambodia has been able to attain strong governance quality is challenged by weak economic growth despite continued governance legislative and judiciary bodies. Cambodia challenges. Growth has been feasible thanks to relative predictability and certainty in a business environment that is relatively open. Basic state 6  Corruption Perceptions Index 2015, Transparency functions have been guaranteed, including its ability International. 7  Enterprise Surveys, 2016, World Bank Group. 30 Country Context ranks 112th out of 113 countries in World Justice a lack of focus on systematic and institutionalized Project’s 2016 Rule of Law Index. Weak legislative provision of social services poses risks to shared and judiciary bodies undermine multi-party prosperity. Patron-client relations pervade the pluralism, rule of law, and civil and political liberty formal state administration, making it systematically (Un, 2005). While a number of judicial reforms and less functional, and pose challenges to even access laws and regulations adopted over the past fifteen and quality of public services (e.g., access to justice years have broadened the role and increased the to sort out problems over land or, in some cases, use of the court, there is evidence of the lack of rent-seeking by doctors and teachers). These barriers judicial independence, often in favour of elites (Un, disproportionately affect the poor and vulnerable. 2008). In 2015, an overwhelmingly large number of For these reasons, this SCD discusses challenges Cambodians (91 percent) felt that democracy is the and potential reforms in this area to ultimately best form of government; however, the percentage enhance state effectiveness while enhancing voice of respondents who were satisfied with how and accountability and limiting corruption in service democracy works in Cambodia was only 69 percent, delivery (see section 6.5). down from 82 percent in 2012 (Chu et al., 2016). A series of political crises in 1997, 1998, 2003/4, and … and a large rural population that 2013 highlighted the need to strengthen state still depends on agriculture and institutions further. remains vulnerable Lack of voice and limited access to legal protection due to weak democratic governance contribute Another distinguishing feature of Cambodia is its to the slowdown of institutionalization of public predominantly rural population and, for a MIC, services and could eventually threaten overall the level of continued reliance upon agriculture social stability. While the existing patronage-based for income and employment. In the 1970s, a large distribution of resources has allowed for some trickle- proportion of the population was forced to relocate down to the Cambodian poor and has contributed to to rural areas. The proportion of rural population social stability to some extent (Craig and Pak, 2011), today, at 80 percent, is still higher than it was prior to the Khmer Rouge regime (Figure 3, left panel). Agriculture has played an important role in growth CAMBODIA: Sustaining strong growth for the benefit of all Figure 2. Cambodia rates relatively low on and poverty reduction and still represents a major certain governance indicators portion of the economy. In the short period from 2007 to 2009, 3.3 million people escaped from Voice and Accountability 1.5 poverty, with most of the 25-percentage-point 1.0 decline in poverty during that time attributable to 0.5 Control of Political Stability agricultural and agricultural wage income. Around 0.0 and Absence of Corruption -0.5 Violence/Terrorism 4 million Cambodians rely on agriculture and -1.0 -1.5 fisheries as their primary source of livelihood, while an additional 1 million people work in agriculture on Rule Government a seasonal basis to supplement their income and/ of Law Effectiveness or support their food security (FAO, 2014). Although the share of agriculture value-added in total GDP Regulatory Quality declined from 50 percent to 33 percent during the 1990s, it has averaged 33 percent since 2000—now Cambodia 2014 Cambodia 2005 one of the highest proportions in the world (Figure Lower-MIC 2014 ASEAN-5 2014 3, right panel). Source: World Governance Indicators, World Bank Group. 31 Figure 3. Cambodia stands out in agriculture value-added and rural population Rural population, % of total Agriculture value added, % of GDP 100 60 90 50 % of total population 80 40 % of GDP 70 30 60 20 50 10 40 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2015 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Cambodia Lower middle-income Cambodia Lower middle-income Vietnam Nicaragua Guatemala Philippines Bangladesh Source: World Development Indicators. Despite the remarkable progress achieved thus Cambodia’s rural population is also especially far, rural areas lag behind urban areas in socio- vulnerable to natural hazards and to the adverse economic outcomes and in access to basic public impacts of unsustainable natural resource use. goods and services. Although national-level Cambodia has relatively high exposure to natural MDG targets for access to improved sanitation and disasters and is expected to be one of the countries drinking water have been met, rural areas have most affected by climate change. Most of Cambodia’s significantly lower access to improved sanitation food-insecure are rural people who are active in facilities (30.5 percent in rural areas versus 88.1 agriculture, and weather shocks often have severe percent in urban areas in 2015) and improved impacts on rural livelihoods. For example, during CHAPTER 2: Context: Cambodia’s development trajectory water supply (69.1 percent in rural areas versus 100 the 2015-16 El Nino event, three-fourths of the wet percent in urban areas in 2015).8 Access to electricity season paddy rice production area experienced has increased significantly, from 33 percent in 2012 a loss of more than 25 percent in yield due to to an estimated 60 percent in 2015; however, only drought. Over the past two decades, Cambodia has half of the rural population has access to electricity experienced a degradation of its natural resources— compared to almost the entire urban population. 9 including through illegal logging, soil exhaustion Access to all-weather roads and reliable transport due to mono-crop cultivation, and overfishing. options is also significantly lower in these areas. In Natural asset degradation threatens the livelihoods addition, health centers are scarce in rural areas, and and physical safety (from landslides and flooding) of strong evidence indicates that the lack of secondary many Cambodians. schools in the Northeastern and Southwestern provinces is correlated with the percentage of young people out of school (Sohnesen et al., 2016). 8  WHO/UNICEF Joint Monitoring Program. 9  According to SCD-related discussions with the Ministry of Mines and Energy, conducted in October 2016. 32 33 CAMBODIA: Sustaining strong growth for the benefit of all Country Context Chapter 3 What have been the drivers of stellar growth and poverty reduction performance in Cambodia? 3.1 Success in poverty reduction thanks extreme poverty now estimated to be below the to job creation and a windfall from World Bank Group target of 3 percent. Over a comparable time period between 2004 and 2012, higher agricultural commodity prices extreme poverty (based on USD 1.90 a day at 2011 PPP) declined at a rate of 1.3 percentage points Cambodia has been one of the leading per year on average—the second highest rate countries in poverty reduction and shared among Cambodia’s peers, behind only Vietnam prosperity where poverty declined by 1.9 percentage points CHAPTER 3: Drivers of growth and poverty reduction per year over that period (Figure 4, right panel). Over the last decade, high economic growth In the aftermath of the global financial crisis, in Cambodia has been accompanied by an Cambodia also showed the highest rate of growth impressive reduction in monetary poverty, in mean consumption among the bottom 40 with Cambodia outperforming its peers. As of percent compared to its peer group, including 2014, only 13.5 percent of the population lived Vietnam (World Bank, 2016). under the national poverty line, compared to 47.8 percent of the population in 2007 (Figure 4, left Cambodia’s performance in monetary poverty panel). The reduction was particularly dramatic reduction is mirrored by improvements in living during the 2007-9 period, at the peak of the standards. The gains in poverty reduction are agricultural commodity boom, when poverty reflected in other indicators of living conditions: declined by about 25 percentage points, and between 2007 and 2015, ownership of cell phones more than 3.3 million people escaped poverty. increased by 51.9 percentage points, ownership of Estimates based on the international poverty a motorcycle by 28.5 percentage points, access to line of USD 1.90 (in 2011 PPP) a day also show electricity by 34.9 percentage points, and access strong performance throughout 2007-14, with to piped water by 7.3 percentage points (Figure 5). 36 Drivers Figure 4. Cambodia has achieved impressive progress in poverty reduction over the past decade Poverty incidence, national line* Annualized reduction in poverty (based on the international $1.90 per person per day poverty line)** 70 2.0 1.9% 60 Annualized change (%) 1.5 % of total population 50 1.3% 40 1.0 30 20 0.5% 0.5 0.3% 0.3% 10 0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004-12 2004-12 2005-10 2005-09 2003-12 Vietnam Cambodia Bangladesh Nicaragua Philippines Source: Official estimates, and CSES (2004-2014); World Bank staff estimates from the Global Monitoring Report (2015). Notes: *Authorities re-estimated the poverty line using the 2009 CSES and have not produced comparable estimates for 2004. ** Different periods used in cross-country comparisons due to data availability. These indicators show that overall living standards now, although differences in the way aggregate have improved, a trend that is confirmed using welfare is measured make direct comparisons alternative estimates (see Annex 2). challenging. Growth in Cambodia has been particularly The poorest segments of society experienced favorable for the poor and near-poor since 2007, the biggest reduction in poverty. Different contributing to a decline in inequality. Since 2007, socioeconomic groups—including ethnic consumption per capita for the bottom 40 percent minorities, the poorly educated, and especially grew at an annual average rate of 7.8 percent, small-scale farmers—experienced a sharp decline CAMBODIA: Sustaining strong growth for the benefit of all compared to growth in mean consumption for the top 60 percent of 4.7 percent (Figure 6, left panel). Figure 5. Household ownership of assets and Growth in consumption per capita for the bottom housing amenities have improved significantly 40 percent was especially rapid in 2007-09 with the Change in ownership of assets commodity price boom, at more than 19 percent per and housing amenities, 2007-14 year on average—much higher than the 11 percent annual growth for the top 60 percent. Consumption Electricity 34.9% for the bottom 40 percent continued to grow at a Piped Water 7.3% higher pace than the top 60 percent after 2009, but the pace of growth had slowed to about 3.3 percent Television 5.8% per annum. The pattern of growth favorable to the Cell phone 57.7% poor is mirrored in declining inequality. The Gini coefficient fell from 36.5 in 2007 to 24.3 in 2013, Motorcycle 28.5% although an increase in the Gini coefficient to 27.4 Metal sheet roof 16.5% in 2014 indicates that inequality has begun to rise 0 10 20 30 40 50 60 (Figure 6, right panel). Nevertheless, Cambodia is more equitable than other countries in the region Source: World Bank staff estimates from the CSES, 2007-2014. 37 Figure 6. Growth became pro-poor after 2007, in the context of high agricultural commodity prices Growth in consumption per capita Trends in consumption inequality: 2007-2014 19.7 20% 40 36.5 34.3 35 30.8 30.3 27.4 Annualized growth (%) 15% 30 27.0 26.7 24.3 11.3 25 10% 7.8 20 15 5% 4.0 10 3.3 1.2 5 0% 0 2007-09 2009-14 2007-14 2007 2008 2009 2010 2011 2012 2013 2014 Bottom 40 percent Top 60 percent Source: World Bank staff estimates from CSES (2007-2014). in poverty (Table 4). In terms of economic sectors, While child survival has improved significantly, with the incidence of poverty in 2007 was highest under-five mortality declining from 117 to 29 deaths among those headed by someone in agriculture (57 per 1,000 births between 1990 and 2015, as many percent), who then experienced a 44.5 percentage as 33.5 percent of children under age 5 remained point reduction in poverty during 2007-14. Notably, stunted in 2014. Similarly, while notable progress has unlike in neighboring Lao PDR and Vietnam, been made in primary education completion (96.3 poverty declined faster among ethnic minorities. percent), secondary completion rates in Cambodia High vulnerability among ethnic minorities now are still low and among the lowest compared to its drives the differences in poverty incidence between peers at 43.6 percent in 2013, versus 71.2 for the ethnic minorities and the Khmer: in good years, the average lower middle-income economy (Figure 7, CHAPTER 3: Drivers of growth and poverty reduction incidence of poverty among ethnic minorities has right panel). been similar to that of the Khmer (e.g., in 2013), but in other years, poverty among ethnic minorities The lower-than-expected human development has increased to rates significantly higher than the outcomes are partly a legacy of conflict and poverty rates of the Khmer. Recent official statistics also of growth and monetary poverty reduction do not provide a regional profile of poverty, but driven by factors independent of the unfinished alternative estimates point to methodological human development agenda. The many killings of challenges that distort the regional profile of Cambodia’s semi-skilled and skilled people robbed poverty (see Annex 2). the country of its human capital—including teachers and doctors—which generally undermined the However, despite the observed progress in living public sector’s capacity to deliver services. While a standards by all measures, significant challenges large disconnect between the levels of monetary remain on the human development front. welfare indicators and human development Although maternal mortality per 100,000 live births outcomes points to challenges in the effectiveness dropped from 1,020 in 1990 to 161 in 2015, it remains of service provision in general, it also suggests that high by international standards (Figure 7, left panel). poverty reduction has been driven by factors that 38 Drivers Table 4. Nearly all types of households and areas experienced a reduction in poverty in 2007-14 Household characteristics 2007 2009 2014 Gender of household head Female 43.6 23.2 17.5 Male 49.6 23.0 11.7 Ethnicity of household head Khmer 48.4 22.8 12.5 Other 52.3 28.6 20.4 Education of household head No education 53.3 26.8 15.7 Primary education 39.6 15.2 8.1 Secondary education 6.1 7.5 2.0 Tertiary education 4.7 4.5 0.9 Employment sector of household head Agriculture 57.2 27.5 12.7 Mining and manufacturing 50.7 21.3 11.4 Construction 59.8 25.3 17.1 Services 30.1 13.6 9.1 Dependency ratio <0.5 38.7 17.1 9.6 0.5-1 53.0 24.8 14.4 1-1.5 59.8 33.2 17.7 >2 56.4 39.5 24.8 Source: World Bank staff estimates from CSES (2007-2014). CAMBODIA: Sustaining strong growth for the benefit of all Figure 7. Cambodia still faces challenges in non-monetary dimensions of well-being Child and maternal mortality, 2015 School completion, 2013 Vietnam Philippines Guatemala Vietnam Philippines Nicaragua Nicaragua Bangladesh Cambodia Guatemala Bangladesh Lower-MICs Lower-MICs Cambodia 0 50 100 150 200 250 300 0 20 40 60 80 100 Maternal mortality ratio (per 100,000 live births), 2015 Primary Completion Rate Mortality rate, under-5 (per 1,000 live births), 2015 Lower Secondary Completion Rate Source: WDI, 2016. Latest available data. 39 are independent of the large, unfinished human unreachable land just when the returns from prices development agenda. were high. This also enabled better movement of perishable higher-value commodities. Unlike in The drivers of poverty reduction have other countries at the time, authorities in Cambodia been low-skilled urban job creation and avoided food price controls, associated taxes or agricultural expansion levies, and restrictions on trade (World Bank, 2016c). Cambodia was exceptional in permitting the export Prior to 2007, the main driver of poverty reduction of large quantities of un-milled paddy, which in Cambodia was growth in low-skilled wage enabled farmers to ride on the wave of Vietnam’s employment in the non-farm sector. In particular, surging rice exports. Many farmers were thus able poverty reduction was driven by the movement of to benefit greatly from the elevated food and people out of agriculture and into the fast-growing agricultural raw material prices, which continued to garment sector. Evidence indicates that participation the end of 2012 (Figure 8). High commodity prices in the garment sector significantly increased welfare seem to have also temporarily resulted in a decline for the bottom 40 percent and that remittances10 in remittances from abroad. originating from the sector contributed to greater household expenditures on education, health, During the boom, rising prices benefited both and investments in agriculture (Mejía-Mantilla and surplus producers and land-poor agricultural Tesfaye, 2016). The increase in salaried non-farm laborers who experienced higher real wages. employment was concentrated in urban areas—for Based on estimates from the 2009 CSES, about 37 example, a rise of 9.8 percentage points in urban percent of rural households owned land that could areas compared to 0.9 in rural areas between 2004 produce a surplus and thus benefited directly from and 2008. Those with post-primary education were price increases. For the 17 percent who did not have better placed to take advantage of these new job land and another 24 percent who had insufficient opportunities, and while educational attainment land, rising rice prices affected them as consumers, increased among the poor, the majority of the yet this was outweighed by the positive effect of better-educated came from non-poor families in that period. This combination of factors meant that, prior Figure 8. Agricultural commodity prices to 2007, the pattern of growth was urban-centered boomed from 2007 to 2012 CHAPTER 3: Drivers of growth and poverty reduction and less inclusive (World Bank, 2013a). Trends in rubber and rice prices, and remittances Rice (Thai) & Rubber (SGP) price i(2003=100) After 2007 and up through 2012, the largest gains 3.5 500 in poverty reduction came from agriculture, as 450 high agricultural prices had a cascading effect on 3.0 400 Remittances, % of GDP rural incomes and made growth pro-poor. Higher 2.5 350 commodity prices incentivized farmers to increase 2.0 300 their use of purchased inputs, bring fallow land 250 1.5 200 into production, and diversify into livestock and/ 1.0 150 or industrial crop production like cashews, cassava 100 and rubber (Eliste and Zorya, 2015). Investments 0.5 50 in rural roads gave farmers access to previously 0.0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10  Income from remittances and transfers increased by 25 Rubber Price Rice Price Remittances, % of GDP percent between 2004 and 2009, and 43 percent of households received remittances in 2011 (ADB, 2014). Source: World Bank commodity prices database. 40 Drivers Figure 9. Household income sources have become more diversified in recent years Trends in household income Composition of household income by source 2009-2014 by source, 2014 1600 100% 6 15 10 5 1400 4 '000 khmer riels (2013 prices) 2 80% 20 Percent of total income 1200 34 42 1000 60% 24 800 1 40% 4 600 400 48 20% 40 45 200 0 0% 2009 2010 2011 2012 2013 2014 Phnom Penh Other urban Rural Wage and salary Agriculture Non Agric Self employment Transfers Other Source: CSES, National Institute for Statistics. increased agricultural wages and higher demand third of income for the bottom 40 percent, with for agricultural labor on the expanded rice-growing the rest coming from wages (including agricultural areas and on lands that had diversified into other wages), household businesses, and remittances. crops (World Bank, 2013a). Daily wages for various Thus, non-agricultural sources of income cushioned agricultural activities spiked at the height of the the impact of declining agriculture growth. In this food price increases, exceeding overall inflation. respect, Cambodia is similar to Vietnam where For instance, daily wages for ploughing for men livelihood diversification in rural areas contributed increased by 44 percent and for harvesting by 41 to poverty reduction and shared prosperity, and now percent between 2007 and 2008 at the height of the non-wage agriculture income constitute about 36 initial price increases. Rising wages, together with percent of incomes for the bottom 40 percent. This land expansion, have given rise to an accelerated use implies that the rural non-farm economy could be CAMBODIA: Sustaining strong growth for the benefit of all of tractors and other machines since the late 2000s. a significant contributor to poverty reduction and shared prosperity in Cambodia in years to come. Around 2012, households began diversifying their income into non-farm income, as the agriculture Rural households have increased the contribution sector started to experience a slowdown. In 2012, of non-farming income sources by diversifying rice prices started to decline, and rubber prices into non-farm household businesses and non- collapsed, especially affecting farmers who had farm wage employment, rather than transitioning diversified into industrial crops. Declining prices, entirely out of agriculture. Overall, the share of coupled with weather events in 2013 and 2015, households engaged in agriculture remained very resulted in a slowdown and stagnation in agricultural high, at nearly 95 percent, indicating that most GDP in recent years. However, rural households households engage in agriculture and have not have increasingly diversified their livelihoods, entirely transitioned out of the sector. An increasing tapping both into the rural off-farm economy and number of these households diversified into non- remittances which sustained income growth in rural farm sources of income instead. By 2014, less than areas (Figure 9, left panel). By 2014, agricultural one quarter of rural households depended on income only accounted for about one-quarter of agriculture as their sole source of income, down by total rural incomes (Figure 9, right panel) and one- nearly 13 percentage points if compared with 2007. 41 The highest growth was in construction, with the of the total Cambodian population) in Thailand share of households earning income from the sector, alone, with evidence suggesting the presence of increasing from an average of 10 percent during significant but unknown additional numbers of 2007-2011, to about 16 percent in 2014. Participation undocumented migrants (EMD and USAID, 2016). in manufacturing activities has lately rebounded, International remittances seem to have increased with a 3 percentage point increase in households when agriculture prices declined and vice-versa with this source of income since 2011. The bump (Figure 10), suggesting that either people migrate in participation in the hotel and restaurant sector more and/or migrants remit more money when occurred prior to 2007 and the share of households there is a slump in agriculture. Thus migration and obtaining income from this sector has hovered remittances act as a household coping mechanism. A around 6 percent since then. The outcome of a recent study finds that households receiving internal combination of increased income from the non-farm and international remittances could reduce their sector and remittances is that agriculture now only poverty headcount rate by 3-7 percentage points constitutes one-fifth of rural incomes. (Roth et al., 2015). However, this study also indicated that a majority of international emigrants are illegal, Migration contributed to the continued reduction especially to Thailand. Thus, continuous efforts in poverty during the current agriculture from both countries towards formal registration slowdown. Estimates from the CSES indicate are required to avoid the risk of unsafe migration that domestic remittances recipient households methods and human trafficking. Furthermore, most increased significantly, reflected in the substantial potential migrants have not completed school and increase in the proportion of rural households who work in either construction or crop farming, and received domestic remittances, from 11 percent in therefore do not possess the necessary technical 2004 to close to 33 percent in 2014. International or professional skills that are most in demand by migration also increased, with about 7 percent of businesses. Evidence from a firm survey (EMC and rural households having an international immigrant USAID, 2016) shows that businesses’ top selection in 2014. As of 2015, there were an estimated 900,000 criteria include related work experience and literacy registered Cambodian migrants (or 6 percent in both Khmer and English, in addition to completion Figure 10. Households with income from domestic and international remittances CHAPTER 3: Drivers of growth and poverty reduction has significantly increased in recent years Households with income Households with income from domestic remittances from international remittances 35% 20% 600 18% 30% 500 16% Fractions of households Fractions of households Rice, Thai 5% ($/mt) 25% 14% 400 20% 12% 10% 300 15% 8% 200 10% 6% 4% 5% 100 2% 0% 0% 0 2004 2009 2014 2004 2009 2014 Rural Urban Rural Urban Rice price Source: CSES, National Institute for Statistics. 42 Drivers of a certificate in certain skills – the type of skills most grew at nearly 13 percent a year.11 Growth in total Cambodian migrants do have. factor productivity (TFP) contributed one-seventh of GDP growth during this time. By sector, out of Nonetheless, agriculture remains a core part of the average 7.6 percent economic growth, services the economy and rural livelihoods. While it has (including tourism) contributed 2.4 percentage been declining—as is typical during processes of points to GDP growth on average during 1995-2015, structural transformation—the share of agriculture and garments contributed another 1.5 percentage in total GDP (30 percent in 2015) remains significantly points. The contribution of agricultural crops and higher than in other Asian economies, as well as the livestock averaged around 1 percentage point up average for lower middle-income countries (around to 2013, but the sector stagnated in 2014 and 2015 18 percent of GDP). As of 2014, Cambodia had 4 due to adverse weather conditions (see UNICEF, FAO, million direct jobs in agriculture (including livestock and WFP, 2016), lower commodity prices, and other and fisheries) which represented 47 percent of total factors as discussed above (Figure 11). Likewise, the employment. It is also worth noting that consumption contribution to growth from the fisheries sector growth was substantially lower when agriculture averaged 0.3 percent between 1996 and 2013 but growth slowed down after the commodity price fell to zero for 2014 and 2015, likely due to variation boom. Thus reinvigorating agriculture growth will in hydrological conditions caused by drought. be just as important as sustaining non-agricultural Recently, construction and real estate have joined growth in reducing poverty in the coming years. as the fourth driver of growth, although this sector has proven highly volatile, with a price bubble burst 3.2 Cambodia’s main engines of growth in 2009-10 provoked by the global financial crisis. to date: export-led growth linked to In terms of employment, around 3.6 million new jobs were created in industry and services and 0.7 basic human and natural resources million in agriculture and fisheries over the past two decades, highlighting the urban transformation, Over the past two decades, economic growth with jobs increasingly located in towns and cities. in Cambodia has been rapid and resilient. As mentioned earlier, Cambodia ranked sixth in the Cambodia has enjoyed blistering growth world in economic growth in 1994-2015, with an CAMBODIA: Sustaining strong growth for the benefit of all in labor-intensive exports of goods and average rate of 7.6 percent. Economic growth has services also been resilient, with the economy expanding at 5 percent in 1998, the year of the East Asian financial During 1994-2014, Cambodia registered the crisis. Although economic growth decelerated to 0.1 world’s fastest growth rates in exports of goods percent in 2009 in the context of the global financial and services, with particularly dramatic growth in crisis, it rapidly rebounded and remained strong at garment exports. The annual growth rate of goods an average of 7.2 percent during 2010-2015. Except and services exports was a blistering 19.6 percent, during those two external crises, inflation has been with Cambodia ranking second in the world after kept at single digits. Equatorial Guinea and ahead of stellar performers such as Vietnam (15.5) and Bangladesh (15.3).12 This Cambodia’s exceptional GDP growth has been growth was driven mostly by garment exports and driven by exports and investment as well as tourism receipts. Investors were encouraged to invest structural transformation. Exports of goods and in these sectors because of growing comparative services—mainly garments, rice, and tourism— grew at an average rate of more than 19 percent annually during 1994-2014, and total investment 11  World Development Indicators, the World Bank Group. 12  World Development Indicators. 43 Figure 11. Growth in Cambodia has been driven by garments and services, with more volatile contributions from agriculture (including fisheries) and construction Sector contribution to GDP growth 12% contribution, percentage points 9% 6% 3% 0% -3% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Agriculture Garment Other manufacturing Construction and real estate Services GDP growth Source: National accounts of Cambodia. advantage and export opportunities not limited by 2.7 billion) and industry (USD 9.8 billion) (Council for the size of its domestic market. Growth in garment Development of Cambodia, 2012). Travel (tourism) exports was especially dramatic (albeit from a low accounted for about 70 percent of services exports base): between 1993 and 2014, garment exports in 2013, and it was estimated to be a source for grew at such a high annualized rate (31 percent) that direct employment opportunities for 300,000 in practice they doubled every two years until the people in 2014.14 financial crisis in 2008.13 Strong economic performance was facilitated by The impressive growth of tourism has been domestic reforms, highly favorable policies, and another success story, with the sector becoming the external environment. As discussed earlier, an important engine for growth, employment Cambodia has been a highly open economy since its CHAPTER 3: Drivers of growth and poverty reduction generation, and investment attraction. Cambodia early days, with few restrictions on trade in goods and received nearly five million tourists in 2015, up from services. More than two decades of sustained large less than 250,000 in 1995, contributing around 17 donor inflows helped fund much-needed public percent of GDP and making tourism an important infrastructure after the long destructive civil war. The source of foreign exchange, investment, and United States’ granting of MFN status to Cambodia in employment (Figure 12, right panel). The tourism 1996 and increasing quotas after 1999 contributed boom, mostly around the world-famous Angkor to the entry of garment manufacturers operating in Wat complex, attracted more than USD 19 billion Southeast Asia into Cambodia (Bargawi, 2005; Hill in foreign investment between 1994 and 2011, and Menon, 2014). Although the U.S. quota system accounting for more than half of total investment ended in 2004, the European Union’s preferential approved in Cambodia over this period and more duty-free access for all exports since 2001 under than the combined investment in agriculture (USD the EBA arrangement has ensured continued high 14  World Bank staff estimates following the UN World 13  Given stagnant or declining unit values over this period, Tourism Organization’s recommendation on concepts, the volume of textile and garment exports grew more than definitions and classifications for basic tourism statistics, and that in dollar value. based in the CSES 2014. 44 Drivers Figure 12. Cambodia has experienced blistering growth in garment and tourism exports Cambodia merchandise exports (USD million) International tourism recipts 16000 3500 18 14000 3000 16 12000 14 2500 12 10000 2000 10 8000 1500 8 6000 6 4000 1000 4 2000 500 2 0 0 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Apparel and textiles US$ million (left axis) % GDP (right axis) Source: World Bank staff estimates using data from COMTRADE (mirror data), WDI. growth in garment exports as well as exports of than one-quarter of aggregate output (or real GDP) footwear and fragrant milled rice. Import tariffs are growth in Cambodia. With its growing working-age the only protective tool, although accession to the population, Cambodia is still in the early phases WTO and ASEAN has already reduced applicable of its “demographic dividend” and has so far been tariffs substantially. Cambodia offers de jure one of extremely successful in creating jobs for youth and the most open investment regimes, maintaining women in labor-intensive activities. The contribution very few policy restrictions and prohibitions to FDI of employment in Cambodia was very substantial entry. Cambodia’s service sector is also one of the during the boom years of 1999-2007, but then most open, with an ‘open skies’ civil aviation policy decelerated in the aftermath of the crisis. Similarly, and foreign companies able to invest and operate the TFP contribution was strong in 1993-2007 but CAMBODIA: Sustaining strong growth for the benefit of all in the legal, accounting, transport, banking, and decelerated in 2010-2014, although it remains telecommunications sectors. stronger than in Vietnam. To compensate for this, Cambodia is sustaining economic growth through Workforce expansion has been driving capital deepening, although the contribution of economic growth in Cambodia, while labor capital accumulation is still significantly lower than productivity gains have been more modest in Thailand or Vietnam during the boom years. than in other fast-growing countries Cambodia’s performance on labor productivity Growth has been driven mainly by labor inputs looks less impressive. In 1993-2014, Cambodia and capital, with Cambodia enjoying faster TFP registered 3.5 percent growth in labor productivity growth than Vietnam. Cambodia’s growth in 1993- compared to the 4.7 percent achieved by Vietnam 2014 was driven by the contributions of capital (4.2 during the same period and to the 7.1 percent percentage points) and employment (1.7) and, to average growth rate in Thailand during the boom a lesser extent, by TFP, labor quality, and working years of 1986-96 (Figure 13, right panel). Capital hours (Figure 13, left panel). From 1993 to 2014, the deepening contributed only 2.1 percentage points increase in raw labor input alone accounted for more to Cambodia’s average productivity growth rate— significantly lower than in Vietnam and Thailand, 45 Figure 13. Cambodia’s growth has relied on capital and workforce expansion, while labor productivity gains have been lower than in comparators Growth accounting Labor productivity decomposition 8% Thailand 1986-1996 6% 4% Vietnam 1993-2014 2% Cambodia 0% 1993-2014 -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Cambodia Vietnam Thailand 1993-2014 1993-2014 1986-1996 Labor quality Avg hours Employment Capital TFP Capital intensity Labor quality TFP Source: World Bank staff calculations using National Accounts and WDI. which suggests that Cambodia has fallen behind in right panel). It is worth highlighting the caveat that upgrading its production technology. This may help standard productivity estimation techniques may explain why labor productivity in industry does not underestimate the productivity of the agriculture seem to be significantly higher than it was in the sector due to its high seasonality, as observed in 1990s (Figure 14, left panel). other countries. Alternative calculations under an assumption that labor force in agriculture Structural transformation, or the movement of is overestimated by 30 percent would imply a labor from lower-productivity activities (such higher agriculture productivity level, while a large as agriculture) to higher-productivity activities productivity gap with respect to the manufacturing (such as industry and services), contributed and services sectors would still persist, and CHAPTER 3: Drivers of growth and poverty reduction significantly to economic growth over the structural transformation (inter-sectoral reallocation past two decades. The transfer of labor reduced of workforce) would remain the main driver of agriculture’s share of employment from 79 percent labor productivity growth in Cambodia (World in the early 1990s to 47 percent by 2014 (Figure 14, Bank, 2012a). In fact, during 2009-2015, 1.3 million left panel) and enabled a significant contribution jobs were created in industry and services, while to labor productivity growth. Nonetheless, a employment in agriculture decreased by 0.4 million decomposition analysis of labor productivity shows jobs in a context of declining commodity prices. some slowdown in structural transformation during Nonetheless, it is also worth mentioning that the the second half of the 2000s, in the context of rising observed low levels of agriculture productivity agricultural productivity and commodity prices, in Cambodia are, in part, likely to do with the fact and wages in industry not increasing significantly. that Cambodia is specialized in the production The level of labor productivity in the industry and of unprocessed rice, while there is evidence that service sectors in the mid-1990s was around 5 and other crops (coffee, pepper, fruits) have higher 4 times, respectively, that in agriculture, but by productivity. Thus, diversifying beyond rice would 2014, agriculture productivity was catching up, be a way for Cambodia to significantly increase narrowing the difference to just 3 times (Figure 14, agriculture productivity and growth. 46 Drivers Figure 14. The labor productivity gap between the modern and traditional sectors has narrowed, partly contributing to some slowdown in structural transformation Employment share, by sector Labor productivity - constant 2005 USD 90% 2500 80% 70% 2000 60% 1500 50% 40% 1000 30% 20% 500 10% 0% 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Agriculture Industry Services Agriculture Industry Services Total Source: World Bank staff calculation using national accounts. At the same time, strong agriculture performance that investments in irrigation in Cambodia have not and high commodity prices contributed to been as productive as expected (Wokker, Santos, the reduced (relative) attractiveness of out- and Ros, 2012). migration and garment factory work at a time when wages in manufacturing were not rising The levels of capital accumulation and significantly. Labor productivity in agriculture savings have been lower than in other grew faster than in industry and services, reducing economies experiencing sustained fast the gap between agricultural and non-farm wages. growth Rising agricultural labor productivity stemmed CAMBODIA: Sustaining strong growth for the benefit of all from smallholder land-use expansion, gains in Cambodia achieved strong growth in investment crop yields, and diversification into higher value- for more than two decades, although investment added crops including through increased plantings rates remain lower than for its comparators of rubber, cashews, pepper, and other tree crops and other sustained-growth countries.15 Gross (Table 5). Land under cereal production increased capital formation (GCF) grew by an average of by 50 percent between 2002 and 2012 as a result nearly 13 percent annually in 1994-2014—much of favorable prices and improved market access. faster than annual growth in employment, implying Between 2002 and 2012, the average annual rising capital intensity for the economy. However, growth in yields was an impressive 5.0 percent preliminary evidence suggests that growth in capital for rice, 9.1 percent for maize, and 6.3 percent for sugarcane production. Rubber plantings nearly quadrupled from just under 56,000 hectares in 15  Countries that have grown at high rates for many decades like Thailand, Malaysia, Korea, Indonesia, and China have 2002 to 213,000 hectares in 2011. Contributing maintained high investment rates since the 1970s, and even factors included increased use of high-quality as late as 1980-2010 averaged rates of 34, 31, 38, 28, and 40 seed, better access to mechanized services, and, percent of GDP, respectively (Kim et al., 2014). The Growth Commission report recommended that countries maintain in some locations, improved access to irrigation investment rates of at least 25 percent of GDP or more for (Eliste and Zorya, 2015), although there is evidence sustained strong growth based on successful countries. 47 Table 5. The agricultural sector has experienced rapid land-use expansion and growth in yields 2002 2012 Annual Average Growth Rate (%) Crop Production Cultivated Yield Production Cultivated Yield Production Cultivated Yield (ton) Area (ha) (ton/ha) (ton) Area (ha) (ton/ha) (ton) Area (ha) (ton/ha) Rice 3,822,509 1,994,645 1.916 9,290,940 2,980,297 3.117 9.3% 4.1% 5.0% Maize 148,897 80,470 1.85 950,909 215,442 4.414 20.4% 10.3% 9.1% Cassava 122,014 19,563 6.237 7,613,697 337,800 22.539 51.2% 33.0% 13.7% Vegetables 163,175 34,433 4.739 411,435 54,155 7.597 9.7% 4.6% 4.8% Soybean 38,661 33,438 1.156 120,165 70,972 1.693 12.0% 7.8% 3.9% Sugarcane 173,105 9,581 18.068 1,220,255 36,722 33.230 21.6% 14.4% 6.3% Source: World Bank staff calculation using national accounts. stock per unit of labor has not grown as rapidly as the falling rate of return on investment. Physical it did in Vietnam or Thailand. Capital formation as a capital investment is a robust determinant of percentage of GDP has traditionally averaged less growth (Fernandez, Ley, and Steel, 2004; Durlauf, than 20 percent of GDP in different sub-periods, Kourtellos, and Tan, 2008), although the impact of lower than for all of Cambodia’s comparators except such investment varies widely.16 What is critically Guatemala (Figure 15, left panel). important for the effective translation of capital accumulation into output (i.e. for higher productivity Most of the investment was financed by donor of capital) is the incentive for making investment as inflows and foreign investors because national well as the incentive for allocating that investment savings have been low and falling in recent efficiently. Equipment investment is found to years. While the gap between national savings and generate more growth than building investment, capital formation was under 2 percent of GDP for and countries with high equipment investment had CHAPTER 3: Drivers of growth and poverty reduction most of the past decade, it increased significantly higher growth (Summers and DeLong, 1991, 1992). in the aftermath of the 2009 crisis and was above While total investment in Cambodia has been rising 10 percentage points of GDP in 2015 (Figure 15, in recent years, it has not done so significantly in right panel). It is estimated that in 2015, about equipment and machinery but rather in residential 10 percent of GDP in terms of capital formation and commercial buildings with lower rates of return was financed by FDI, and around 6 percent of GDP (Figure 16). The return to capital is indeed falling, was financed by donors. Government-financed although it remains significantly higher than in investment accounted for a modest 2-2.5 percent of Thailand or Vietnam. GDP in 2015 (Sánchez-Martín et al., 2016), which is low by international standards, and the rest up to 22 In summary, growth in Cambodia has been led percent of GDP would have been financed by non- by exports of goods and services, with growth government domestic savings. 16  The Soviet case is instructive in that it had a very high While capital formation has increased in recent rate of investment, but it resulted in low productivity of years, the allocation of this investment appears capital because investments went into activities without consideration of their productivity levels, with little incentive to have become less efficient, as manifested in to invest in higher-productivity activities. 48 Drivers Figure 15. Gross capital formation in Cambodia has been lower compared to almost all comparator countries, and the savings-investment gap has been growing Average gross capital formation, 1994-2014 Cambodia's savings–investment gap 35% 25% 30% 20% 25% Percent of GDP Percent of GDP 20% 15% 15% 10% 10% 5% 5% 0% 0% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 a h ala a es m gu di es na pin m bo lad ra et te ilip ica am ng Vi ua Ph N Ba G C Gross national savings Gross capital formation Source: World Development Indicators. Figure 16. Cambodia’s share of equipment investment in total investment has not increased significantly, and the return to capital has been falling Equipment and construction in total Rate of return on capital investment in Cambodia 30% 45% 40% 25% 35% 20% 30% Percent of GDP 25% CAMBODIA: Sustaining strong growth for the benefit of all 15% 20% 10% 15% 10% 5% 5% 0% 0% 1993 1996 1999 2002 2005 2008 2011 2014 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015/p Construction Durable Equipment CAM VNM THA Source: National accounts of Cambodia, Vietnam, and Thailand. in labor inputs and substantial unskilled job sectors, labor productivity in industry has grown creation, while most of the poverty reduction more slowly than in other countries during fast in rural areas can be attributed to higher growth periods. In addition, capital accumulation in productivity and prices in agriculture. While terms of machinery and durable equipment seems Cambodia has been able to attain strong and to have been lower than in Vietnam and Thailand sustained growth led by the garment and tourism during the years of the boom. 49 Chapter 4 What are the challenges Cambodia faces in sustaining strong growth and improving equity outcomes over the next decade? Going forward, increased human youthful population into the labor market will and physical capital are needed for continue to serve as a natural engine for growth in the foreseeable future. Cambodia to reap the demographic dividend and reach upper middle- However, it is clear that the contribution to growth income status will not be as substantial as that observed during the last two decades. The demographic dividend is Cambodia still has the opportunity to enjoy at risk given the relatively high level of child stunting, a demographic dividend over the next three at about 33.5 percent in 2014 as discussed earlier. This decades. The UN population projections indicate implies that one-third of the future workforce is likely CHAPTER 4: Challenges to growth diversification that Cambodia’s population will continue to grow to be less productive, at least in terms of cognitive at an average compounded rate of 1.06 percent per skills. Moreoever, the fractions of the population with year from 2015 to 2050, while the growth rate of the no schooling and primary education are projected to working-age population (between 15 to 64 years only decline from 33 and 52 percent, respectively, to old) is projected to be slightly higher at around 1.12 23 and 49 percent between 2016 and 2050,17 which percent. Taking population dynamics into account, may be insufficient if Cambodia needs to “leapfrog” the pool of potential workers is expected to expand beyond low-end garments. by more than 135,000 persons per year on average over the next 35 years. The increase in the potential The challenge is to ensure that the country makes workforce will not be uniform, and the pool will the investments that will allow it to capitalize on start to contract around the year 2047. The total the benefits of the dividend as well as prepare dependency ratio is projected to improve gradually until 2044, and then start to increase thereafter 17  These numbers were calculated using a linear probability (Figure 17). Hence, the gradual entry of Cambodia’s projection of educational attainment based on current trends. 52 Growth Figure 17. Cambodia’s demographic dividend scenario assumes significant improvements in the would need to be accompanied by shares of the population with upper secondary and higher physical and educational investments post-secondary education, totaling 38 percent by 2050 (compared to 17 percent in the baseline), and a Dependency ratio gross investment rate of 27 percent of GDP. Under the 1.2 optimistic scenario, the labor productivity growth Population under 14 and over 65/ rate would hover above 4 percent throughout the 1.0 forecast horizon, while real GDP growth would working age population 0.8 decline gradually to around 5 percent by 2050, with Cambodia reaching upper middle-income status by 0.6 2049 (Figure 18). 0.4 Looking beyond projections based on historical 0.2 trends and into concrete sectors, going forward, 0 Cambodia may not be able to rely on the same 1990 2000 2010 2020 2030 2040 2050 factors that drove poverty reduction over the Source: United Nations World Population Prospects: 2015 Revision. past decade, including high agricultural prices. As discussed in the previous section, productivity gains for the eventual aging of the population. Going and rising agriculture prices contributed the most to forward, it will become increasingly important to poverty reduction through direct increases in farmer promote productivity growth (capital deepening) and agricultural labor income and the multipliers and to foster savings to avoid future fiscal problems these had through the demand for services. In the with old age dependency. In addition, better coming years, agricultural commodity prices are not education opportunities are needed for new expected to return to the levels that prevailed in the generations to meet the requirements of employers as they try to move into higher value-added Figure 18. Higher physical and educational processes and products. investments would be needed for Cambodia to become an upper middle-income CAMBODIA: Sustaining strong growth for the benefit of all Long-term growth projections suggest that increased capital investment and a significant economy by 2050 shift in educational attainment are necessary for 14% 40% Cambodia to become an upper middle-income % population age 15+ with upper 12% 35% secondary education & above economy before 2050. A companion paper to this 30% SCD, aimed at contributing to the preparation of the 10% % GDP growth Cambodia Vision 2050, features long-term growth 25% 8% projections based on historical trends (baseline 20% 6% scenario) and under a higher physical capital 15% and educational attainment scenario (optimistic 4% 10% scenario). Under the baseline, and assuming a yearly 2% 5% gross investment rate of 24 percent of GDP, labor 0% 0% productivity and GDP growth rates would gradually 1993 1997 2001 2005 2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049 fall to 3.2 percent and 3.6 percent, respectively, by Optimistic: GDP growth Optimistic: Usec & Col (RHS) 2050. Under this baseline workforce educational Baseline: GDP growth Baseline: Usec & Col (RHS) attainment scenario, Cambodia would attain upper Source: World Bank staff calculations. Note: “USEC and Col” refers to middle-income status by 2058. The optimistic upper secondary and college education. 53 late 2000s to early 2010s. Setting aside forested and concentration of total exports on garments, along protected areas, the scope for agricultural land use with weakening external competitiveness, could expansion is much more limited now than in the risk a slowdown in growth of total exports and past. Going forward, Cambodia’s agriculture would hurt future growth (ADB, 2014). The potential for need to generate ‘more from less’—that is, realize economic diversification may be constrained by higher levels of farmer, fisher, and consumer welfare rising wages, limited human capital, and relatively and non-farm spillovers, while directly employing high costs in terms of informal fees and electricity fewer people,18 improving its natural resource use (ADB, 2014; Hill and Menon, 2014; UNDP, 2014a). efficiency, and reducing its overall environmental In addition, the widening investment-savings gap footprint. To achieve this, a gradual transformation makes strong growth in investment increasingly of the sector would involve processes of difficult, as domestic savings are not sufficiently intensification, diversification, and value addition.19 rising and as Cambodia becomes increasingly As being witnessed in the region—and notably dependent on foreign savings. This section discusses in Vietnam20—these processes can be enabled by both challenges to economic diversification and securing land tenure (and farmer rights to choose constraints to household economic mobility, i.e. land uses), supporting a more vibrant multi-actor opportunities to escape from poverty as well as to system for agricultural innovation, facilitating transition from the non-poor but vulnerable stratum private value chain investment, and strengthening into economic security. (public and market) institutions to manage food and agricultural risks. 4.1 Challenges to economic diversification Moreover, weaknesses in the economic development model are becoming more apparent The rapid growth of the garment sector, which and challenge the prospects for strong economic transformed the country’s export basket in a growth in the coming decades. The prospects for relatively short period of time, has resulted in a non-agricultural employment will depend upon high degree of product and market concentration. greater investments in export upgrading and The share of resource-based products like wood manufactured product diversification. Excessive and rubber fell from 80 percent of merchandise exports in 1995 to less than 10 percent by 1999, 18  Official statistics indicate that primary agriculture (plus while garments quickly expanded to represent 80 fisheries and forestry) accounted for 47 percent of employment CHAPTER 4: Challenges to growth diversification percent of total goods exports (Figure 19).21 Rapid in 2014. This is likely to be an over-estimate. Many farm activities, especially crop production, require part-time and/ concentration in garments is explained by the or seasonal labor effort. For example, a 2013 survey found wet nature of the first FTAs signed by Cambodia and season rice to involve 48 person days/ha while both dry season its comparative advantage in low-wage assembly, rice and maize required less than 32 days/ha. Farm families typically use a combination of household and hired workers and its openess to capital flows. Some export plus devote considerable amounts of time to other activities, diversification into electrical appliances and other including micro-enterprises, trading, construction, etc. As most of the latter activities involve informal rather than formal work, manufacturing has been observed in Cambodia household members members are typically just categorized as ‘agricultural’ workers. 19  Going forward, we would expect to see far fewer people 21  The analysis of export performance in this section is based regularly employed in rice farming, more people engaged in on mirror data from COMTRADE unless otherwise noted. Some horticultural and livestock production, and increasing numbers differences exist between different data sources on the exact of people involved in upstream (i.e. mechanical services) and value and composition of Cambodia’s exports. However, the downstream (i.e. food processing; food service) dimensions of use of mirror data seems to minimize the major inconsistencies the agro-food system. found in other data due to unofficial exports to Vietnam and 20  World Bank (2016) Transforming Vietnamese Agriculture: Thailand (mainly of agricultural products) and transshipment Gaining More from Less. Vietnam Development Report. of Cambodia’s exports in Singapore and Hong Kong. 54 Growth Figure 19. The dramatic shift in sector composition of Cambodia’s merchandise exports resulted in a high concentration in garments Cambodia (% total exports) Vietnam (% of total exports) 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 1994 1999 2007 2014 1994 1999 2007 2014 Textiles Footwear Vegetable Transportation Textiles Footwear Vegetable Transportation Mach/Elec Wood Plastic Other Mach/Elec Minerals Animal Other Source: World Bank staff estimates using data from COMTRADE. in recent years, representing around 5 percent that same item from all countries).23 In addition, few of total exports in 2014, but they are far from the new garment products have been introduced, with levels observed in Vietnam (60 percent of total). the rate of addition of new products falling from Cambodia’s garment exports have been directed 25 per year to only 10 in recent years—in fact, the mainly to the U.S., although the EU became the same 20 items have accounted for three-quarters of top destination in 2014, with fast growth since the all garment exports since 2000.24 Competition in the simplification on rules of origin and the introduction low-quality export market is challenging since large of “single transformation” to qualify for access under low-cost suppliers like Bangladesh and Vietnam also CAMBODIA: Sustaining strong growth for the benefit of all the EBA from 2012 onwards (Figure 20).22 target this segment. Most of Cambodia’s garment export items are Going forward, diversifying within and beyond targeted to the low-quality/low-price segment of garments, attracting more FDI, and exploiting the U.S. market, with little diversification within new export markets would be necessary to garments. Seven of the top eight 8-digit garment continue creating job opportunities. As a lower export items, accounting for half of all garment middle-income economy, Cambodia will likely exports, have unit values of less than one (where experience a progressive erosion in preferential trade one implies the import price of the Cambodian item treatment and a decline in concessional financing equal to the weighted average U.S. import price of over the next decade. Therefore, some of the factors that were supportive of economic growth in the past may no longer be there. 22  Between 2001-2011, double transformation (i.e. ‘yarn to fabric and fabric to garments conversion’) was required for 23  One item (i.e. HS 61103030 “other sweaters, man-made Cambodian garment exports to qualify for duty-free, quota- fabric”) has consistently registered unit values that are well free access in the EU. This constrained export potential since above the average unit value in the U.S. market. Cambodia is not a producer of fabric, with most of the inputs 24  World Bank staff estimates using data from COMTRADE for the industry imported from China (74 percent in 2015). and USITC. 55 Figure 20. Cambodia’s garment exports Declining external competitiveness and have been concentrated mainly on the EU erosion in preferential treatment challenge and U.S. markets exports Garment exports by destination Despite recent efforts toward higher value- 3000 addition, productivity in Cambodia’s garment sector is still lower than in most structural 2500 peers. While labor productivity for the median 2000 manufacturing firm in Cambodia is better than in USD million most comparator countries (except for the Philippines 1500 and Vietnam), productivity for the median garments 1000 firm is the second lowest after Myanmar (Figure 500 21, left panel). The results suggest that Cambodia’s relatively low labor productivity—at least compared 0 to the best-performing countries in the region— 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 may be partly related to low capital intensity and EU USA CAN JPN RoW the fact that investors in the garment industry use Source: World Bank staff estimates from COMTRADE (mirror data). Cambodia mainly as an export platform for low-cost, Note: RoW = rest of the world. low-productivity production. Differences in worker education and investment climate might also explain part of the observed gap. There is some evidence Cambodia stands at a critical juncture in of training by firms to improve workers’ skills so generating new sources of job creation. they can work with higher-technology machines Cambodia’s large-scale agricultural workforce (Yamagata, 2006).25 makes it important to foster linkages between small landholders and large-scale agricultural The slow movement toward more complex and farms or corporations to ensure the development higher value-added garment production is likely of agro-processing industries, increase the amount due to the high degree of foreign ownership. Most of high value-added exports, and accelerate agro- factories in Cambodia are involved in cut-make-trim industries growth. However, the most critical source (CMT) production, and only in recent years has there of job creation and long-term economic growth been a gradual movement of factories toward full- CHAPTER 4: Challenges to growth diversification will come from Cambodia’s industrialization, with package-service free on board (FOB) production (ILO, new industries as well as manufacturing breaking 2016).26 Unlike CMT, FOB factories must source and into new markets with high value-added products, purchase inputs on their own, make samples, maybe including consumer products and production wash and print, as well as negotiate with buyers equipment. The industrial and services sectors are on the samples. These tasks require the capacity to where most of Cambodia’s jobs—and better-quality finance, procure, and develop samples for approval, jobs—would likely be created. This, in turn, opens involving competencies and skills that go beyond up important public policy questions for Cambodia around cluster development within the national 25  The same study found that all surveyed firms provided business environment. training to their local personnel, ranging from one week to more than three months, although a number of their trained workers moved when they found better jobs. 26  Preliminary evidence shows that the CMT share of production fell from 87 percent of the total in 2006 (Yamagata, 2006) to 60 percent in 2013 (Kane, 2014). 56 Growth Figure 21. Stagnation in garment labor productivity may be the result of firms specializing in low-productivity / low capital-intensive areas; foreign firms rely on foreign inputs Firm-level productivity and capital intensity, 2016 Inputs of foreign origin Myanmar Thailand 2015-16 Cambodia Guatemala 2010 Bangladesh Philippines 2014-16 Philippines Vietnam 2015 Thailand Cambodia 2013 Guatemala Nicaragua 2010 Vietnam Bangladesh 2013 Nicaragua Cambodia 2016 0 3000 6000 9000 12000 0% 20% 40% 60% 80% 100% Capital intensity Median productivity (garments) Domestic firm Median productivity (manufacturing) Foreign firm Source: Enterprise Surveys, World Bank Group. cutting and sewing. These factories are also the ones sectors, while Koreans invest in construction, and that are likely to generate higher domestic value- Vietnamese invest mostly in agriculture. Preliminary added. The slower movement toward FOB is likely data from the Enterprise Survey 2016 suggests that due to the fact that almost 95 percent of garment foreign-owned manufacturing firms are mostly factories are wholly foreign-owned.27 The parent using Cambodia as an export platform for low-cost, companies have less incentive to build capacity and low-productivity production activities with limited upgrade in Cambodia, unless shifting value-adding potential for transferring capital and knowledge activities from parent headquarters to Cambodia to Cambodia. According to enterprise surveys, the reduces cost. share of imported inputs for the production process CAMBODIA: Sustaining strong growth for the benefit of all by foreign-owned manufacturing firms established Foreign-owned firms are export-oriented and in Cambodia, at 95 percent, is by far the largest rely on imported inputs. Since the global crisis, among peer countries (Figure 21, right panel). Cambodia has attracted larger net FDI inflows on average than any other peer countries, at an average Firms relying on foreign inputs are also more prone of 8.5 percent of GDP in 2010-2015. In 2012-2014, an to licensing foreign technologies, but contrary to average of 48.2 percent of total FDI inflows originated other countries, the use of foreign technologies in China, followed by ASEAN (18.3 percent), South in Cambodia does not seem to be associated with Korea (16.1 percent), Taiwan (6.2 percent), Japan more propensity to innovate or introduce new (4.7 percent), and the EU (4.6 percent). Most Chinese products. Similarly, exporters in Cambodia are not investment occurs in the garment and construction found to be more likely to undertake innovation activities than non-exporters and domestic firms, 27  The vast majority of these factories are integrated into and firms in retail and other services are more likely to triangular manufacturing networks in which global buyers from the EU and United States source from transnational undertake innovation activities than manufacturing producers headquartered in Taiwan (China), Hong Kong firms. These findings suggest that foreign investors, (China), Korea, Malaysia, and mainland China, with production, especially in garments, see Cambodia mainly as an export, and management decisions for factories in Cambodia made in those headquarters (Natsuda et al., 2009). export-oriented low-cost platform and do not have 57 plans for long-term production upgrading and Low wages and preferential market access—two diversification. While domestic Cambodian firms also pillars that allowed the impressive growth of report using significant imported inputs (28 percent), Cambodia’s exports over the last two decades— the difference with respect to other countries is more are expected to be eroded in the medium term. modest. In general, firms that use imported inputs A changing external environment will bring more would be better-integrated into global supply chains competitive pressure for Cambodia’s exports in the than others, although the potential spillover benefits medium term. As mentioned earlier, higher wages, related to FDI would be smaller when foreign-owned the emergence of new low-wage competitors like firms and exporters primarily use imported inputs Myanmar, and preference erosion in main export (lower scope for backward linkages). markets will pose challenges to further export growth (Hill and Menon, 2014). The EU-Vietnam Despite the ease of establishing wholly foreign- FTA (EVFTA) will eliminate nearly all tariffs for owned firms, no significant investment has Vietnamese products in the EU over a seven-year been made in backward integration of the period. Nonetheless, it is worth noting that most garment sector, probably due to the costly Vietnamese garment exports will be subject to business environment. According to interviews double transformation to enter duty-free in the with private sector representatives, the fact that EU, which will require backward integration and firms in Cambodia have specialized in maquila production of some fabrics locally, while Cambodia, (assembly) types of activities may be in part because under the EBA, is only required to undertake single factories for producing knitted fabrics are much transformation and can import fabrics and other more capital-intensive than those for garments inputs from anywhere in the world. For the garment and require adequate scale and availability of industry, the most promising sign is the recent raw materials. It may also be in part because such expansion of duty-free access to some travel goods factories consume much more electricity and by the United States which would benefit Cambodia, water, and so must rely much more than garment among other least developed countries. factories on infrastructure like reliable electricity and water supply at competitive cost. More recently, In this context, some nascent diversification garment sector competitiveness has weakened due toward higher-value export products aside from to rapid escalation in legislated minimum wages. garments, footwear, and agriculture seems to be The minimum wage has risen at an average rate of taking place. Export sophistication,29 dominated more than 23 percent annually between 2012 and by low value-added garments, has remained flat CHAPTER 4: Challenges to growth diversification 2016, significantly faster than wage increases in since the mid-1990s and until recently, when a competitor countries like Bangladesh and Vietnam, few emerging products appeared in the export as discussed in the next section. If other costs mix (Figure 22). A number of these products— (electricity, transport and logistics, management) do such as bicycles, ignition wires, optical appliance not come down substantially or labor productivity parts, electric motors (including for smartphones), does not rise at that rate, these higher wages are likely to reduce profit margins for higher-value of garment firms, and changes in garment-buyers order pipelines may provide more evidence on how garment firms garment producers/exporters and/or render many are affected. other garment operations unprofitable (Hill and 29  The sophistication of a country’s export basket (denoted Menon, 2014; ILO and IFC, 2016).28 as ‘EXPY’) derives from the sophistication of the individual products in it (denoted as ‘PRODY’) and is based on the exports of developed economies. Hausmann, Hwang, and 28  GMAC reports suggest a greater number of garment Rodrik (2006) show that high-EXPY countries tend to have firm closures than opening of new ones in 2015. Further higher future growth rates, supporting the idea that countries examination of 2010-16 data on FDI applications and ‘become’ what they export by converging to the income level approvals in the garment sector, annual closings and openings implied by their export baskets. 58 Growth Figure 22. Export sophistication and emerging exports products have started to increase in Cambodia Export sophistication Top new exports outside garments 25000 1000 800 20000 USD million EXPY index 600 15000 400 10000 200 5000 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Cambodia Vietnam Nicaragua bicycles TV parts ignition wires optical appl. parts Guatemala Philippines Bangladesh electric motors headphones pet food seat parts Source: World Bank staff estimates using data from COMTRADE. television parts, and headphones—have grown upgrading and backward integration, and strengthen very rapidly in recent years. Although together they education and industry-specific skill development in account for more than one-fifth of all non-garment order to keep attracting FDI and achieve economic exports, their contribution to total export growth diversification (UNDP, 2014a). remains modest. These exports are part and parcel of the regional value chains in machinery and transport For agriculture, Cambodia would need to in China and Thailand and are led by Japanese firms,30 reposition its exports and develop a competitive although it should be noted that the production response to high-value food imports in order processes taking place in Cambodia encompass to return to a higher growth trajectory. With CAMBODIA: Sustaining strong growth for the benefit of all mainly assembly. the primary exception of high-quality fragrant rice exports to the EU, Cambodia’s agricultural exports This is a great start to merchandise export have been raw materials (e.g., dried paddy, dried diversification to higher-value products that cassava, in-shell cashews, raw rubber) transported ought to be nurtured. Upgrading and expanding to neighboring countries where value addition garment exports remains important for sustaining takes place. In several of these areas, there is scope strong export growth and employment in the to attract investment in agro-processing and sell coming decade, while Cambodia pursues integration the finished product regionally and beyond, but in other global value chains. The challenge will be Cambodia will have difficulty competing as a low- to maintain competitiveness (as discussed in more cost bulk supplier. It will need to position both its detail in the next subsection), provide incentives for primary and finished product exports in the high- quality and sustainably produced segments of the market. For example, Cambodia could position itself 30  Minebea, Denso, Sumitomo Electric, and Yazaki are among the companies that have already invested in the Phnom in the lucrative and growing markets for organic Penh export processing zone. Minebea is the most advanced, cashews, pepper, mango, and other products, employing 6,500 people, and has begun a major expansion of while scaling up its exports of high-quality branded its factory to expand employment to 20,000, for the first time introducing processes other than assembling. rice. At home, a dietary transition has begun with 59 increased demand for animal products, vegetables, sea-sun-sand and nature-based destinations, and processed foods. A large proportion of current Cambodia’s tourism sector remains narrowly demand is imported, yet there is ample scope for focused around the Angkor Wat complex, although import substitution for a range of these products. the country is endowed with numerous historical, This is not simply to serve Cambodia’s growing cultural, and natural destinations. Tourist destination (yet still quite small) middle-income consumer diversification would help improve Cambodia’s class, but perhaps more importantly—given the tourist return rate—which currently stands at country’s nutritional deficit—to ensure physical and about 16 percent compared to over 50 percent economic access of the poor and near-poor to high- for Thailand—and further broaden the domestic nutrient foods. market base, encouraging additional investments in the services sector such as travel services, With regard to services exports, Cambodia has telecommunications, transport, and hospitality. unique assets for tourism development but risks Development of eco-tourism could help create sliding toward a ‘low-value, high-volume’ model. employment opportunities in rural areas, potentially Key attractions include the World Heritage Site of providing households with a complementary Angkor Wat, religious and cultural sites, and nature income source, and would also help to mitigate tourism and adventure activities. These tourist environmental degradation. arrivals exhibit a stable pattern of travel through regional hubs in Thailand, Vietnam, and China. Direct Cambodia faces three main challenges to employment in the tourism sector was estimated at diversifying and increasing value in tourism: 300,000 people in 2014,31 of which more of half are insufficient infrastructure beyond the main taken by women. However, some challenges could tourism enclaves, limited human capital threaten the chances for developing tourism as a availability, and declining price competitiveness. central pillar of an inclusive economy. Value captured First, according to the World Economic Forum’s Travel per tourist has not changed much in the past decade, and Tourism Competitiveness Index, Cambodia lags from USD 585 in 2005 to USD 630 in 2015—higher behind Asia–Pacific benchmarks for infrastructure than the average for Lao PDR or Myanmar but just competitiveness (113th out of 141 countries in 2015), one-third that of Vietnam. International tourists who health and hygiene (112th), and environmental visit as part of a package tour stay in Cambodia for sustainability (118th). The insufficient transport an average 4.6 days, while independent travelers infrastructure and poor environmental services hold stay for 7 days. Average daily spending across all back sustainable and more inclusive tourism growth, CHAPTER 4: Challenges to growth diversification international overnight markets is about USD 120 as many secondary destinations are unable to attract per day. Low-end businesses have mushroomed, private investment. This discourages visitors from stays are short with limited repeat visits, and there venturing off the beaten track, which keeps driving are signs of overcrowding and degradation of the the imbalanced growth around Siem Reap and Phnom key assets at the Angkor temples. Penh. Second, industry stakeholders report that the need for quality human resources far outstrips supply, Diversification of tourist attraction sites beyond and lack of well-trained workers is one of the main the Angkor Wat complex may be necessary barriers to improving tourism service quality and to restore strong growth in tourism arrivals. competitiveness. Technical and vocational education Unlike Thailand, where 80 percent of tourists prefer and training (TVET) enrollment as a percentage of secondary enrollment is just 2.3 percent, and 31  World Bank staff estimates following the UN World tertiary gross enrollment rates are the lowest in Tourism Organization’s recommendation on concepts, ASEAN after Myanmar. Third, in recent years (2013- definitions and classifications for basic tourism statistics, and based in the CSES 2014. 15), Cambodia has experienced a significant decline 60 Growth in competitiveness for tourism services, with rising could pose a serious constraint. Some of these issues prices and exchange rate “leakages” (in the context of are discussed in more detail in the next subsection. U.S. dollar appreciation). The business environment remains challenging (129th), and while Cambodia is Strengthening the modern services sector could doing well overall in terms of prioritization of tourism be a way for Cambodia to move on from its current services by country authorities (37th), it still lacks a labor-intensive, low value-added (assembly) country brand strategy. mode of global value chain (GVC) participation. Modern services such as finance, insurance, Beyond tourism, while a high degree of openness telecommunications, and transport and logistics in terms of regulation helps increase Cambodia’s are critical inputs for manufacturing exports, and diversification in services, human capital may an efficient services market is essential to enhance be a constraint. While travel receipts represent a country’s competitiveness. Since services areas 70 percent of total service exports in Cambodia like design, marketing, and retailing are segments (Figure 23), modern services exports to other East where the majority of value added is captured within Asian countries—including information technology- value chains, enhancing the competitiveness of the related services—are expected to play a more services sector is a main priority for upgrading in important role in Cambodia in the future. Cambodian GVCs. The contribution of services for manufacturing firms are already tentatively exporting some niche exports in Cambodia (6.3 percent) has improved, services such as computer-based animation. A but it is still one of the lowest in the region and lags potential opportunity for Cambodia is that it is one other countries that have successfully integrated of the most open ASEAN economies in terms of trade into GVCs like Thailand (10.2 percent) and Vietnam in services (ASEAN Secretariat and World Bank, 2015), (9.5 percent). although transparency issues and informal fees need to be tackled in order to attract foreign investment However, diversification in services may be and to promote the expansion and diversification constrained by still-limited technological of high-value services (World Bank, 2014a). While readiness. With very little infrastructure remaining Cambodia’s largely young population is a potentially after the civil conflict, Cambodia bypassed critical asset for the expansion of services industries, rebuilding the fixed-line market and quickly CAMBODIA: Sustaining strong growth for the benefit of all low educational attainment at the secondary level launched into alternative technologies, jump- starting its telecommunications infrastructure with digital technology. Not surprisingly, mobile Figure 23. Services exports are services have completely overwhelmed the market. concentrated in tourism At 133 in 2015, Cambodia holds the largest mobile Services exports by sector, 2013 cellular subscriptions per hundred people among its peers. Mobile broadband subscriptions, at 10 per Rest 4% hundred,32 are below the shares of Guatemala (18 Financial 2% percent) and Vietnam (10 percent) but higher than Communications 3% in other lower middle-income economies (Figure Other business 24). The expansion of internet services in Cambodia services 9% has been largely overshadowed by the strong focus Travel 70% on mobile services. Internet take-up rates remained Transport 12% 32  Telecommunication Regulator of Cambodia “Mobile Phone Subscribers.” Available at http://www.trc.gov.kh/ Source: UNCTAD Stats. mobile-phone-subcribers/. Accessed on December 30, 2016. 61 Figure 24. The expansion of internet services in Cambodia has been overshadowed by the strong focus on mobile services Mobile and internet penetration 140 133 130 118 116 120 111 Per hundred people 100 83 80 60 52.7 40.7 40 27.1 19 22.9 19.7 17 18.8 17.4 20 10 9 14 14.4 11 14 1.9 1.3 0 Cambodia Vietnam Philippines Bangladesh Guatemala Nicaragua Mobile cellular subscriptions Mobile broadband subscriptions Internet users Households with Internet Source: International Telecommunication Union, World Telecommunication’s ICT Development Report and database, and country authorities. disconcertingly low for many years, with the country but still lags significantly behind the Philippines claiming one of the lowest fixed internet broadband and Vietnam. These countries are also better than penetration rates in the region (0.6 percent in 2016). Cambodia at turning relatively poor availability of Overall, according to the World Economic Forum, inputs (institutions, human resources, infrastructure, Cambodia has significantly improved in terms of market and business sophistication) into innovation technological readiness, from lagging significantly outputs (such as knowledge and creative goods). behind in 2005-2006 to being close to the lower Limited ICT adoption and low tertiary education middle-income average in 2015-2016, but is still far attainment are likely to constrain Cambodia’s ability from the ASEAN-5. to innovate. In addition, perception data by company executives points to likely areas of relative weakness Finally, low innovation and public and private for Cambodia compared to better-performing research and development (R&D) spending could comparators, such as the availability of scientists hurt prospects for economic diversification and and engineers, company spending on R&D, and CHAPTER 4: Challenges to growth diversification value addition. According to the Global Innovation availability of venture capital (Figure 25). Cambodia’s Index (GII), Cambodia ranked 95th out of 128 countries modest innovation drivers result in low innovation in 2016, a significant improvement compared to outputs, such as a low share of high-tech products in just 3 years ago (110th in 2013).33 Among its peers, manufactured exports (less than 1 percent) and a lack Cambodia is ahead of Bangladesh and Nicaragua of patent applications, which challenges prospects for economic diversification and sophistication. 33  The GII has been jointly prepared each year since 2007 by the World Intellectual Property Organization (WIPO), Cornell University, and INSEAD, using a variety of different Informal competition and fees challenge the data sources on innovation inputs and outputs (for details creation of a vibrant private sector and methodology, see: https://www.globalinnovationindex. org). While it constitutes a good starting point for the analysis, it may not perfectly capture the scope of innovation in LDCs Entrepreneurs point to a number of constraints such as Cambodia, where there are issues of data availability/ that hinder external competitiveness as well as the quality and where innovation is likely to be more incremental creation of a vibrant private sector in Cambodia, and consist more of adaptation of existing technology and processes. with informal sector practices emerging as the 62 Growth Figure 25. Cambodia lags behind comparators on availability of scientists and engineers and R&D Perception of Cambodia’s comparative performance on innovation drivers (scale 1-7) FDI and technology transfer State of cluster development Venture capital availability Company spending on R&D Ease of access to loans University-industry collaboration in R&D Extent of staff training Quality of scientific research institutions Intellectual property protection Availability of scientists and engineers 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Bangladesh Cambodia Philippines Thailand Vietnam Source: WEF, Executive Opinion Survey 2016. Figure 26. Biggest obstacle to firm operation Customs and trade regulations Courts CAMBODIA: Sustaining strong growth for the benefit of all Crime, theft and disorder Tax administration Labor regulations Percentage of firms Business licensing and permits Access to land Electricity Tax rates Corruption Access to finance Transportation Inadequately educated workforce Political instability Practices of the informal sector 0% 5% 10% 15% 20% 25% 30% 2007 2013 2016 Source: WEF, Executive Opinion Survey 2016. 63 top constraint. Perceptions are consistent with the small informal enterprises and only a few large, ratings on dimensions of economic competitiveness modern businesses.35 Burdensome formalization by the World Economic Forum (2015), as presented processes, which make Cambodia one of the most earlier. The latest World Bank Group Enterprise difficult places in the world to register a business,36 Survey34 indicates that in 2016, informal sector may be one of the explanations for the ‘missing practices were perceived as the main obstacle for middle’ segment of businesses, which would be key firm operation (28 percent of respondents), followed to productivity improvements and job creation since by political instability (16 percent), an inadequately many firms may opt to remain ‘small.’ educated workforce (11 percent), and access to finance and transportation (Figure 26). Electricity is no Although fewer entrepreneurs are listing longer listed among the main concerns—most likely corruption as the top obstacle, corruption is still a product of improvements in reliability of supply, regarded as an impediment to private sector although costs do remain high. Increased concerns development. In 2013, 47.8 percent of firms over informal sector practices may be related to the regarded corruption as one of the biggest obstacles sustained increase in wages that is resulting in the to conducting business in Cambodia. This number emergence of informal garment suppliers. Following dropped to 10.2 percent in 2016, as informal practices labor riots in the aftermath of the 2013 National have become the main concern. Nonetheless, during Assembly election, political instability has become consultations, business leaders described how a rising concern, especially as the 2018 elections corrupt practices occur through the acceleration of approach. Nonetheless, the tripartite taskforce approvals, licenses, and other paperwork required created in August 2013 to determine minimum wage for investment. Lack of transparency in the handling in the garment sector has shown to be an effective of dealings between the public and private sectors mechanism for fostering dialogue and agreement. was cited as a source of frustration that hindered making existing markets more efficient and the Informal competition puts firms based in creation of new markets. The consequence is not Cambodia in a disadvantageous position. only the formation of inefficient projects but also the According to the Enterprise Surveys, informal practices corollary of higher costs to consumers. are an increasing concern. In 2016, the percentage of firms that declared they were competing against In fact, Cambodia still has the highest incidence unregistered or informal firms (77.8 percent) was the of corruption among its structural peers and highest among Cambodia’s structural peers (Figure CHAPTER 4: Challenges to growth diversification 27). In addition, the percentage of firms formally 35  According to the Economic Census of Cambodia 2011, microenterprises (employing between 1-20 staff ) account for registered appears to have declined significantly around 97 percent of firms, while large enterprises (employing between 2013 and 2016 (from 83.5 percent to 69.5 over 100 staff ) represent less than 1 percent of businesses. A percent), a period in which both minimum salary weakness in the structure of Cambodia’s private sector is the ‘missing middle’: only 2 percent of businesses fall into the and tax compliance efforts increased significantly. category of being SMEs that employ between 11-50 staff, while According to the latest enterprise census, Cambodia’s medium-sized enterprises with between 51-100 staff account private sector is dominated by informal and very for 0.2 percent of businesses. 36  Cambodia made progress in 2015 in making it easier to start a business by simplifying company name checks, streamlining tax registration, and eliminating the requirement 34  Business owners and top managers in 373 firms were to publish information in the official gazette. Nonetheless, interviewed from February 2016 through June 2016. The Cambodia still ranks 180th out of 189 countries on this sample comprised 135 manufacturing firms, 102 retail dimension, with 87 days needed to start a business (compared firms, and 136 firms operating in other services. Survey to 25.9 in East Asia and the Pacific) and high costs (78.7 data is publicly available at the following webpage: http:// percent) and minimum capital requirements (24.1 percent) in www.enterprisesurveys.org/data/exploreeconomies/2016/ terms of income per capita, which are likely to discourage the cambodia establishment of firms. 64 Growth Figure 27. Informal practices and bribery incidence are high compared to structural peers Informal practices Governance obstacles 100% 80% 70% 805 60% 60% 50% 40% 40% 30% 20% 20% 10% 0% 0% 13 16 ar a es d m h ala h ala 13 16 ar a es d m gu gu es es an an nm nm na na pin pin m m 20 20 20 20 lad lad ra ra ail ail et et te te ya ya ilip ilip ica ica Th Th a a a a ng ng Vi Vi ua ua M M di di di di Ph Ph N N Ba Ba G G bo bo bo bo am am am am C C C C Percent of firms formally registered when they started Percent of firms identifying the courts system operations in the country as a major constraint Percent of firms competing against unregistered or Bribery incidence (percent of firms experiencing informal firms at least one bribe payment request) Source: Enterprise Surveys, World Bank Group. economic competitors. In the 2015 Corruptions fees have a significant negative impact on the Perceptions Index, Cambodia still ranked 150th competitiveness of firms located in Cambodia. (with only Afghanistan and North Korea performing worse in the Asia Pacific region).37 When looking In terms of infrastructure constraints faced by at actual briberies, Cambodia still has the highest the private sector, most of the transportation incidence among comparators by far (Figure 27, requirements of Cambodia continue to be served CAMBODIA: Sustaining strong growth for the benefit of all right panel). As of 2016, gifts or informal fees were by road. According to the Ministry of Public Works expected in public transactions (according to 59.4 and Transport (MPWT), the country had 2,200 percent of total respondents), meetings with tax kilometers and 5,000 kilometers of first- and second- officials (58.7 percent), construction permits (86.8 order national roads in 2015, of which 100 and 57 percent), electrical connection (61.6 percent), percent were paved, respectively. The network also and water connection (48 percent). In 2013-2016, includes about 8,000 kilometers of provincial/tertiary significant efforts were made to curb informal fees roads plus an estimated 35,000 kilometers of rural for getting operating licenses (declining from 100 to roads, most of which are unpaved and in very poor 50.3 percent) and import licenses (from 87.7 to 63.4 condition, hampering access to markets (including percent). However, the percentage of firms surveyed for agricultural goods), schools, and services in that declared to be expected to give gifts to secure a rural areas. Given funding limitations, the focus has public contract is now much higher than before (from been first on those national roads that comprise the 7 to 87.5 percent in the same period). According to backbone of international connectivity, followed both domestic and foreign entrepreneurs, informal by domestic main arteries (inter-provincial), then intra-provincial, and so forth. Both policy and overall road management functions reside almost entirely 37  Transparency International: http://www.transparency. org/cpi2015 with the MPWT, which is in charge of primary and 65 secondary roads. The Ministry of Rural Development but slightly declined since 2010. The observed is in charge of tertiary and rural roads and faces decrease in the transport infrastructure quality funding and capacity constraints in managing its index, from 3.1 out of 7 in 2010 to 2.9 in 2016 extensive rural network. (Figure 28, left panel), may be due to several factors. First, Cambodia’s transportation infrastructure A main concern is that Cambodia’s transportation is highly vulnerable to extreme weather events, network is not keeping pace with rapid economic with a substantial part of the network at risk growth. During the period 2008-2013, the average (UNDP, 2014b). In addition, maintenance of assets, annual growth in the number of registered vehicles often built by donors, is seldom adequate, with was 14 percent, reaching approximately 2.5 million modest funding and limited subnational capacity. registered vehicles in 2013 and with motorcycles Systematic road asset management is still at an growing the most (22 percent). Congestion is early stage in Cambodia. An assessment of state- already a major problem in Phnom Penh. The funded public investment management reveals infrastructure needs are also illustrated by the rice that most line ministries do not have established sector. Cambodia is expected to produce about feasibility study requirements for project selection 7 million metric tons of paddy surplus (up from or minimum implementation standards, and large 4.3 million in 2012), thanks to better irrigation and infrastructure projects (roads, rural roads, canals) improvement of extension services. Currently, most are often delegated to the donors due to lack of processed rice is exported in containers through capacity (Minh Le et al., 2017). This poses challenges Sihanoukville Port. To export 7 million metric tons for the provision of public infrastructure to ensure of rice, Cambodia would need about 350,000 20ft economic competitiveness. containers, thus about 28 times the number of containers it now uses. Such an increase would bring Cambodia has introduced substantial road traffic to a stand-still (see Slayton and Muniroth, improvements in trade facilitation and logistics 2015). The rehabilitation and opening of the Phnom in recent years, but charges to exporting are Penh-Sihanoukville railway in 2016 appears to be a still significantly higher than in other countries. (slower) alternative to Cambodia’s seaside and main Cambodia has made consistent improvements port, and there are two railways planned to the Thai in its ranking on the World Bank’s Logistics and Vietnamese borders, but they are facing funding Performance Index (LPI), surging to 73 after ranking issues. While aviation growth has been strong a lowly 129 in 2010, a jump of 56 places, with its (tourism and garments),38 other modes play less of score improving from 2.3 to 2.8 (Figure 28, left CHAPTER 4: Challenges to growth diversification a role. Waterways from Phnom Penh to Vietnam panel). The country ranks fourth among the top (mainly oil and cargo) are also used, but most of the 10 performing low-income economies thanks to transportation requirements of Cambodia continue a series of reforms implemented over the past to be served by road. decade, including the adoption of a Customs law,39 the adoption of a risk management strategy The overall quality of transportation at customs, the implementation of automation infrastructure is similar to that of peer countries following international standards (ASYCUDA system), the introduction of single-stop inspection at the border, and the simplification of transit 38  Cambodia is a member of the ASEAN Open Skies operations with neighboring countries (RGC, initiative, which aims to liberalize the commercial aviation market in Southeast Asia. According to Cambodia Airports, 2014b). However, despite these improvements, and from 2011-2015, air passenger traffic grew 13.5 percent per while transportation prices are not significantly annum and air freight 17 percent per annum. Domestic traffic in 2015 comprised 11 percent of total movements by air for passengers and less than 2 percent for cargo. 39  Law NS/RKM/0707/017 of July 2007. 66 Growth Figure 28. Cambodia’s transportation infrastructure and charges are competitive, but forwarding charges are overall higher than in competing countries Transportation infrastructure and logistics Cost to export (USD per container) 6 LPI (1-5) and transport infr. quality (1-7) Thailand 595 5 Vietnam 610 4 Myanmar 620 Philippines 755 3 Cambodia 795 2 Nicaragua 1140 Bangladesh 1281 1 Guatemala 1355 0 0 300 600 900 1200 1500 ar ala a h a es m d gu di es an nm na pin m bo lad ra ail et te ya ilip ica Th am ng Vi ua M Ph N Ba G C LPI 2016 Transport 2016 LPI 2010 Transport 2010 Source: Logistic Performance Index (LPI, the World Bank Group), transportation infrastructure quality index (World Economic Forum), and Doing Business Indicators (the World Bank Group). higher than in neighboring countries, informal Authority of Cambodia, 2016).40 Enterprises reported fees heighten total costs. Trucking firms report less outages,41 and the number of days (7.9) required that informal payments are routinely collected to set up an electrical connection in Cambodia is at weighbridges and checkpoints. According one of the lowest among Cambodia’s structural to interviews with private sector stakeholders, peers (Figure 29, left panel). However, the quality forwarding charges beyond the official customs of services—including reliability and affordability— processing fee (USD 15) would amount to continues to be a concern. around USD 200 (World Bank, 2014c), which is CAMBODIA: Sustaining strong growth for the benefit of all approximately the difference in average cost to However, the price of electricity remains relatively export between Cambodia and Vietnam or Thailand high compared to neighboring countries, and is (Figure 28, right panel). due to the lack of competitive bidding in energy generation, and fragmentation in transmission In terms of electrical supply, Cambodia has made and distribution (Figure 29, right panel). Although rapid strides in providing access to electricity, Cambodia has managed to reduce the tariff availability has improved significantly, and from its highest point by the introduction of new Cambodia has become nearly self-sufficient in hydropower and coal plants, and the displacement supply for the current power demand. Cambodia’s power system expanded significantly between 40  401 MW were imported in 2015 from Vietnam, Thailand, 2011 and 2015, nearly tripling in size, largely driven and Lao PDR. by private sector investments. The household 41  Power outages in Cambodia declined from 6 per month electrification rate increased from below 30 percent in 2013 to 1.4 in 2016, and the duration if an outage occurred decreased from 1.8 to 1.3 hours. These improvements in the to 60 percent, transmission lines also significantly reliability of electricity meant that firms relied less on expensive expanded and energy generation almost doubled diesel-fueled generators, with the surveyed enterprises in the same period, from 2,564 GWh to 4,489 GWh reporting that the proportion of their electricity from diesel generators declined from 22.9 percent to 9 percent in the same (Ministry of Mines and Energy, 2015; Electricity period. 67 Figure 29. While electricity reliability has improved, tariffs remain relatively high compared to those in neighboring countries Electricity access at the firm Electricity tariff, country comparisons 50% 100 20 Days to obtain an electrical connection % electricity from a generator 40% 80 15 cents / kWh 30% 60 10 20% 40 5 10% 20 0% 0 0 h ala 13 M 16 N mar Ph gua Th s Vi d m a es m ar d e es an di an na nm na pin pin m 20 20 lad bo ra ail ail n et et te ya ilip ya ilip ica Th a a ng am Vi ua di di M Ph Ba G bo bo C am am C C % of electricity from a generator, if used Large industry customers Days to obtain an electrical connection Residential Sources: Enterprise Surveys, World Bank Group; Electricity Authority of Cambodia, 2015; Philippines Energy Regulatory Commission, 2016; Vietnam Ministry of Industry and Trade, Decision No. 2256/QD-BCT, 2015; Myanmar Ministry of Electric Power, 2015; Thailand Energy Regulatory Commission, 2016; De Ferranti et al., 2016. Latest available data. of expensive, small-sized fuel oil-based generation private partnerships (PPPs) (except for the first (EAC, 2016), it still has one of the highest tariffs in grid solar project tendered in October 2016) were the world (Derbyshire, 2015). Seasonal fluctuations procured through competitive bidding. In addition, in hydro generation (de Ferranti et al., 2016), the contingent liabilities arising from an increasing high degree of uncoordinated private sector number of energy PPPs could result in significant investments in transmission and distribution, fiscal risks if not managed carefully. Overall, under-utilization of generation and transmission Cambodia’s high cost of electricity has reduced capacity, small economies of scale, inefficient its regional competitiveness and is hindering the system planning and dispatch, and a large number growth of value-added production that requires CHAPTER 4: Challenges to growth diversification of small distribution and retail service providers increased mechanization. add to the costs. To counteract power shortages and enhance energy security, Cambodia has The available skills are unlikely to meet the pursued private sector investments in generation, upcoming needs of firms transmission, and distribution, with 85 percent of generated electricity coming from Independent In the context of rising wages and increasing Power Producers (IPPs) in 2015.42 While Cambodia competitiveness challenges, higher labor has managed to mobilize a relatively large sum of productivity and a better-trained workforce will FDI, predominantly from China and South Korea, be needed to fill the new jobs created at higher none of the generation and transmission public- value-added activities. Cambodia has traditionally been a destination for export-seeking FDI based on 42  44 percent of High Voltage (HV) substations and 52 its strategic geographical location and supply of percent of HV lines were built and operated by the private sector; 58 percent of the customers were served by 336 cheap unskilled labor. After a decade of unmodified licensed service providers, and the rest were served by EDC. low salaries and following the establishment of an 68 Growth Figure 30. The minimum wage is relatively high, while the education level of the workforce remains a concern to firms Minimum wage, USD a month Workforce education and skills 300 50% 250 40% 200 30% 150 20% 100 50 10% 0 0% d es ina m a Pa R M an M lia ng r h 13 16 ar a es d m h ala Ba ma di gu es an es an PD na go nm na pin pin t m Ch 20 20 kis bo lad lad ra ail ail n et et on te ya ilip ya ilip o ica Th Th am a a Vi ng Vi La ua M di di Ph Ph N Ba G C bo bo am am C C % of unskilled workers (out of oil production workers) % of firms identifying an inadequately educated workforce as a major constraint Source: Enterprise Surveys, the World Bank Group. Ministries of Labor of the different countries. effective wage-setting mechanism,43 the minimum and human capital is expected to be increasingly wage in the garment sector nearly doubled from critical as Cambodia tries to move up the value about USD 80 a month in 2013 to USD 153 a chain and diversify beyond garments. According month in 2017, but productivity improvements to the latest World Bank Enterprise Surveys, the have not kept pace. The minimum wage is already proportion of unskilled workers in surveyed firms significantly higher than in Pakistan and Bangladesh dramatically decreased from about 50 percent of CAMBODIA: Sustaining strong growth for the benefit of all (garment exporters) and close to that of Vietnam, the total in 2013 to 20 percent in 2016, showing which enjoys a higher level of labor productivity that entrepreneurs are demanding a more skilled (Ly, 2016b; Figure 30, left panel). As a result, most workforce. While the percentage of firms reporting companies are trying to offer washing, embroidery, an inadequately educated workforce as a major printing, and other activities that add value to the constraint declined compared to 2013, it is still final export, in order to be able to keep competing higher than in other countries in the region (Figure in the context of rising costs. 30, right panel). Consulted business leaders argue for the need to ensure that secondary school curricula In 2016, an inadequately educated workforce was are at the highest standards and that students are among the top three concerns of entrepreneurs, being properly prepared for the workforce in order to avoid a skills mismatch and facilitate business upgrading and higher value addition. 43  A tripartite body consisting of representatives from the Ministry of Labor and Vocational Training, employer associations, and trade unions under the Labor Advisory The training needs are extensive, but for the Committee has been established to handle annual minimum most part, only large firms have the capacity wage negotiations, helping to maintain good industrial to provide such training. Anecdotal evidence relations after large-scale labor unrest occurred in 2013 and 2014, which had negative impacts on investors’ confidence. from the private sector indicates that those hired 69 at the factory gate have limited skills. Firms need parks, and authorities will need to consider policies to start with very basic skills training, adjusting to address housing and basic services in these new their training programs and even processes agglomerations.  to accommodate the low levels of literacy in Cambodia. Most foreign firms provide training to Filling vacancies remains a challenge for firms new hires—from a week to a month in most cases— in Cambodia across all sectors, skill levels, and to train workers to meet factory specifications and regions. The vacancies judged more difficult to firm policies. Firms provide training, predominantly fill were those requiring skilled workers, machine in house, with only large firms able to achieve operators, managers, and craft workers. Vacancies economies of scale to make the massive workforce for elementary occupations (unskilled) were also development investment necessary to start considered hard to fill in almost 75 percent of cases operations. Despite interest from the private sector, (Bruni, Luch, and Kuoch, 2013). Consultations with the skills intermediary ecosystem also seems to be private sector firms revealed that hiring of low- underdeveloped, and just a few pioneer examples skilled/unskilled recruits is largely done at the factory can be found in some special economic zones door, with recruitment done by word of mouth—for (SEZs).44 In general, intermediaries in Cambodia example, through family members or neighbors in have low capacity and lack support (Warr and the provinces outside of Phnom Penh. Interviews Menon, 2015). These systemic deficiencies will with the private sector indicate that firms do not ask limit both SME development as well as the ability for educational credentials from their factory recruits, to attract smaller-scale FDI in emerging sectors, only requiring basic language and math literacy. given that finding skilled workers is particularly Factories have difficulty finding workers with the challenging for SMEs. minimum requirements of basic language and math literacy, while management positions are generally Relatively high turnover rates also create a held by international workers. Other recruitment disincentive for firms to make any significant channels include the internet (websites), job investment in worker training. Apart from low announcements in newspapers and radios, working skills, 22 percent of firms reported high turnover as with universities and TVETs to identify potential their top concern in the Enterprise Surveys. High recruits, and the local National Employment Agency. turnover appears to be related to job (e.g., night shift At present, labor market intermediation services are work, better job and wage offers, and labor migration limited and ineffective. to other countries such as Korea and Malaysia where CHAPTER 4: Challenges to growth diversification wages are higher) and non-job issues (e.g., holidays, School credentials (certificates, degrees) are not a peak agricultural season with workers heading signal of competence or skills of workers. Results home to farms, transportation and safety issues). from a 2011 ILO survey of 78 employers in Cambodia To help retain workers, some firms located in SEZs indicate that 73 percent of employers feel that provide non-financial incentives to workers such as Cambodia’s university graduates do not have the housing/dormitories within the SEZ, cafeterias, and right skills, and more than 62 percent of employers transportation. In general, costs and availability of also noted that vocational training graduates do not housing and transportation services will be a limiting have the right skills (World Bank, 2012b). Around 55 factor for the future expansion of new industries at percent of the interviewed establishments reported a scale envisioned around the SEZs and industrial that employees did not perform at the required level. More than 20 percent of the establishments 44  Some SEZs see training as one of the services for all considered four skills to be necessary: job-specific investors (e.g., Kerry Worldbridge SEZ), while in other SEZs (e.g., tasks, oral communication, knowledge of a foreign PPSEZ and Sihanoukville SEZ), the training center is another investor in the industrial park that will provide training. language, and manual dexterity (Bruni et al., 2013). 70 Growth Most of the universities depend on tuition fees, tend TVETs are not meeting the skills demand of the towards offering programs relating to business, private sector.45 In addition to the challenge of and invest very little in research. According to the attracting a pool of students with strong foundational Ministry of Education, Youth, and Sports, half of the skills, Cambodia’s existing TVET programs face students registered in majors in 2012 were pursuing several institutional challenges in expanding to business administration degrees, compared to just 8 meet industry needs. Financial resources for TVET percent for IT and 3 percent for engineering. Business systems are limited, governance and coordination degrees have mushroomed along with economic is weak across various line ministries with skills and financial sector development. The number of development programs, and curriculum offerings universities increased from just 14 in 2000 (6 of them are not sufficiently diverse. TVETs are expanding private) to 121 in 2016 (73 private). With regards to their two-year diploma and four-year bachelor R&D at Higher Education Institutions (HEIs), funding degree programs in response to demand so they is limited and there are little incentives to research, can raise revenue from these programs. Currently, especially in private universities that run on a most TVET curriculum exists for the Certificate 1 business/fee basis. At the public HEIs, only some PhD (CQF 2) or the Diploma level (CQF 5), with curriculum holders are committed to R&D on their own with little for CQF levels 2–5 focused on traditionally male- or no support for the management; most HEI lecturers dominated occupations—air conditioning repair, make their living by teaching. automotive engineering, civil engineering and electrician training. Such limited course offerings Reported skills shortages in the country are also also contribute to the negative perception of TVET the result of weak TVET, which continues to face among young people as only for blue-collar workers numerous reputational, financial, regulatory and low-paying jobs. Increasing curriculum offerings, and operational challenges. To begin with, TVET however, would not currently require significantly faces a pool of potential learners with very limited greater infrastructure. The 325 existing TVET foundational skills in reading, writing, mathematics, institutions are not currently being fully utilized; they problem solving, communications and teamwork; as could enroll many more students using the teachers a result of high lower and upper secondary dropout in their existing facilities. However, upgrading the rates, a majority of young people are not eligible to curriculum and investing in teachers’ professional CAMBODIA: Sustaining strong growth for the benefit of all enter TVET certificate level courses (CQF 2 and above). development will be required (ADB & ILO, 2015; ADB, Attracting students to TVET is another challenge, 2016). Even for TVETs that have a good reputation as Cambodians have a negative perception of with the private sector, no channels for collaboration TVET as a ‘second rate’ education compared with have been established to understand skills demand attending university, and others do not want to give and needs. Better coordination between vocational up work in order to attend training. Cambodia has training and the main education system would also the lowest relative number of students enrolled in be needed. TVETs, both upper secondary and tertiary, across Southeast Asia (CDRI, 2013). Youth also experience 45  The National Employment Agency surveyed in 2013 financial challenges with paying for transport, more than 500 establishments in six sectors (food and beverage; garment, apparel, and footwear; rubber and accommodation and meals, and receive little career plastic; construction; financial services and insurance; and guidance on employment options after graduation. accommodation). The results showed 72.6% of respondents The majority of TVETs focus on short, community- had hard-to-fill vacancies. Of the companies with hard-to-fill vacancies, a third attributed unfilled vacancies to a lack of the based courses to support households in poverty or required skills among applicants. The 325 TVET institutions risk of exclusion. Upper secondary programs—critical produce around 2,500 qualified graduates per year. Using job vacancies as a proxy for industry demand, the TVET system for Cambodia’s current approach to developing a currently provides an annual supply of suitable graduates of skilled workforce—is shrinking due to lower demand. less than 0.1% of vacancies (ADB, 2016). 71 Figure 31. Growth in the share of economically secure households has been slow, and living conditions lag behind comparator countries Economic mobillity in Cambodia Living conditions/ownership 100% External wall made of 15.7 19.0 concrete, brick or stone 80% 30.4 27.8 32.6 Connectedto electricity Share of the population 31.7 Has piped water 60% 32.5 Has no toilet 41.6 48.5 Owns a refrigerator 40% 46.2 Owns a computer 20% Air conditioner Washing machine 0% 2004 2007 2009 2011 2012 0% 20% 40% 60% 80% 100% Share of the population Extreme poor Moderately poor Economically vulnerable Economically secure Middle class Cambodia: 2013 Lao PDR: 2012 Vietnam: 2014 Source: World Bank staff estimates from CSES 2004-2013; Lao Expenditure and Consumption Survey (LECS) 2012/13; Vietnam Household Living Standards Survey (VHLS) 2014. 4.2 Constraints to household percent of the Vietnamese population had joined the economic mobility emerging consumer class as of 2015. Slow growth in the share of economically secure households in Cambodia is reflected in how the level of comfort (in Beyond extreme poverty, socioeconomic terms of living conditions) lags behind that in other mobility has been limited lower middle-income countries in the region (Figure 31, right panel). Only 18 percent of households Despite sustained economic growth and a rapid live in houses built with brick, concrete, or stone, reduction in extreme poverty, the share of CHAPTER 4: Constraints to household economic mobility compared to 40 percent in Lao PDR and 83 percent economically secure (emerging consumer class) in Vietnam. Just 7 percent of households own a and the middle class barely grew after 2009. refrigerator, compared to 62 percent in Vietnam. This By international standards, most Cambodians not pattern broadly reflects that most households have in extreme poverty are either moderately poor or escaped extreme poverty by only a small margin. economically vulnerable (Figure 31, left panel),46 with The concentration of the distribution in Cambodia per capita consumption of the poorest 20 percent implies large similarities between the second and below USD 3.10 (in 2011 PPP) and the next 46 percent third quintiles, which means that the agenda for between USD 3.10-5.50 per day. Since 2009, only a shared prosperity extends to a larger segment of small segment of the Cambodian population has society. attained economic security and joined the ranks of an emerging consumer class, while an estimated 58 The slow growth of an emerging consumer class in Cambodia can be traced to three factors which 46  The economic classification is based on daily consumption per capita (CPE) in 2011 PPP terms, categorized as follows: reflect weaknesses in the current development Extreme Poor: < USD 1.91 PPP 2011; Moderate Poor: USD 1.91- model. First, household endowments are low in 3.10 PPP 2011; Economically Insecure: 3.10-5.50; Economically terms of both human capital (education and health) Secure: USD 5.50-15 PPP 2011; Middle Class: USD 15-50 PPP 2011. and physical assets (land). Second, households in 72 Inclusion Cambodia have high exposure to shocks. Third, land size trend will likely continue, as land is seen as limited economic diversification has meant slower an important source of security and parents divide growth of economic opportunities outside the and parcel out land to their children. Many older garment sector. This combination of factors has people will be left with little land as a result, adding shaped the livelihoods and opportunities for to those among this generation who did not acquire Cambodians, which in turn determines their ability land after the conflict. Thus, closing the productivity to grow into an emerging consumer class and attain gap in agriculture between Cambodia and other economic security. These factors are discussed in countries (e.g., Vietnam and Thailand) will become greater detail below, and are generally underlined by increasingly important. poor public sector service provision in part driven by weak governance systems. Despite progress thus far, education outcomes are still poor for many households in Cambodia. Limited access to education and land While net enrollment in primary education and inhibits socioeconomic mobility completion rates are high at 97 and 90 percent, respectively, attainment of secondary education Although land is one of the key assets owned or above is low. The average share of working-age by households in Cambodia, it is unequally people with a secondary education is 21 percent. distributed, and many households own only With low enrollment in lower secondary school (38 a modest amount. The average amount of land percent) and upper secondary school (18 percent), owned by a rural household is 1.3 hectares, which at this situation is only changing slowly. It is also made current yields is enough to generate market surplus worse by high dropout rates: only 41 percent of those for a family of five people but is not enough to propel enrolled in secondary education and only 27 percent households into economic security or the middle of those enrolled in upper secondary education class. Moreover, 23 percent of rural households did complete the necessary grades. Drop-outs have not own land in 2014, and another 15 percent owned actually risen, resulting in a decline in the completion less than 0.5 hectares (Table 6) and relied mainly rate of lower secondary education from 49 percent in on agriculture wage labor. The median land size 2008 to the current levels. Consequently, Cambodia has been declining since 2007, indicating that new has the lowest share of adults with lower secondary CAMBODIA: Sustaining strong growth for the benefit of all land areas are no longer significantly gained from education among ASEAN economies (CDRI, 2013) conflict areas, minefields, or forests. This decreasing and its peers. Table 6. Rural land ownership and land sizes have been decreasing in recent years Land ownership category (shares) Land owned (ha) No land Less than 0.5 ha 0.5 – 1 ha 1 – 2 ha More than 2 ha Mean Median 2004 19.7 19.9 27.6 19.6 13.2 1.3 0.68 2007 16.2 19.5 25.5 23.5 15.3 1.4 0.80 2009 17.3 19.0 26.7 20.0 16.9 1.5 0.75 2011 16.2 19.1 28.8 20.3 15.6 1.2 0.73 2014 22.7 15.3 29.6 17.5 15.0 1.3 0.70 Source: World Bank staff estimates from the CSES, 2004-2013. 73 Secondary completion has been limited by group discussions with youth revealed similar results scarcity of schools in certain areas. While (Save the Children and DANIDA, 2014), finding that monetary obstacles is the most prominent reason children over age 15 were more likely to cite the need for lack of enrollment in secondary education, access to earn money for the family (35 percent), too many to schools remains an issue in certain provinces household chores (31 percent), or cost (14 percent) (Sohnesen et al., 2016). The share of out-of-school as the main reasons for dropping out of school. Only children 13-18 years of age is highest in Stung 20 percent (but 31 percent among those under age Treng, Ratanak Kiri, and Mondul Kiri provinces in 15) cited long distance to school as their reason for the Northeast, which combined have 43 lower and dropping out, although cost could also be reflecting upper secondary schools (Figure 32). These areas the issue of traveling distance. On the other hand, are sparsely populated compared to the provinces lack of interest (23 percent) and unavailability of surrounding Phnom Penh, where population density schools (12 percent) are the most cited reasons for and availability of secondary schools are higher. The dropping out of school by children between 6 and 14 lower concentration of schools in the Northeastern years old. The higher drop out due to income related and Eastern areas and the higher percentage of out- reasons for older children thus reflects an increasing of-school children there partly reflect the challenges opportunity cost for investing in education among of effective service delivery to areas with low the poor. population density. The gains from achieving universal primary Households face demand constraints that have education are undermined by poor learning become the main factors behind limited grade outcomes in primary education, and progress completion in recent years. About 67 percent toward improving learning outcomes has of 15-18 year olds who dropped out of secondary been mixed. A national assessment of student school in 2015 were more likely to cite being too achievement (Ministry of Education, Youth and Sport, poor or the need to contribute to household income 2015) found that 39 percent of grade 6 pupils had a as the main reason for dropping out of school, and below basic proficiency rating for reading in Khmer, another 8 percent cited household chores. Focus and 76 percent were rated below basic on writing CHAPTER 4: Constraints to household economic mobility Figure 32. Sparsely populated provinces in the Northeast have more children out of secondary school due to distance Distance to school and non-enrollment, by province 30000 to upper secondary school (m) Average distance from villages 25000 Ratanak Kiri Stung Treng 20000 Koh Kong Mondul Kiri 15000 Preah Vihear 10000 Otdar Meanchey Kampong Chhnang Svay Rieng 5000 Phonom Penh Kampot Kandal Takeo 0 10% 20% 30% 40% 50% 60% 70% 80% Share of children not in school Source: GPS location of villages and secondary schools, and out of school population from CSES 2014. 74 Inclusion Figure 33. Proficiency levels in reading and math are generally very low, and progress has been mixed Grade 6 Khmer proficiency levels Math grade 6 test scores, 2007-13 for reading and writing, 2013 580 560 Overall 49 17.5 27.3 6.3 540 Equated score 520 Writing 75.6 17.8 6 0.6 500 480 460 Reading 38.9 10.9 20.3 29.9 440 420 0% 20% 40% 60% 80% 100% Small rural Large rural Small urban Large urban Below Basic Basic Proficient Advanced 2007 2013 Source: EQAD grade six assessments, 2007, 2013. (Figure 33, left panel). Pupils also performed poorly often caused by misallocation of teachers across on math, with an average test score of 43.4 percent. schools, many of them being reluctant to teach in Compared to 2007, test scores have declined in the countryside (Sohnesen et al., 2016). The quality small rural areas, stagnated in large rural areas, and of instruction is also low: most grade 6 teachers do mostly improved in urban areas (Figure 33, right not know the national curriculum or curriculum panel). These poor learning outcomes are echoed in standard, and while curriculum posters are on employers’ concerns about recruits who have poor classroom walls, teachers have never understood reading and numeracy skills. them. Poor monitoring exacerbates the situation, as most provincial officers of education focus their CAMBODIA: Sustaining strong growth for the benefit of all Poor learning outcomes can be attributed to a monitoring on school program budgets (Ministry of combination of fewer and poor-quality teachers Education, Youth and Sport, 2015). compared to peers, fewer learning hours, and delayed engagement of children in schools due Persistent malnutrition affects learning to low early childhood education enrollment outcomes and human capital formation (World Bank, 2015a). At 46 pupils per teacher, the average pupil-to-teacher ratio in Cambodia New research traces school achievement gaps to exceeds the upper limit (of 40 pupils per teacher) the earliest years and highlights the long-term for which a teacher can provide quality learning consequences of undernutrition. The physical, for each pupil (CDRI, 2014). Primary and secondary academic, and socio-emotional performance school pupils spend fewer hours in class (3 hours of Cambodian children is impaired by early life 20 minutes) than the international benchmark of malnutrition and low access to and enrollment 6 to 8 hours. This impairs cognitive development, in pre-primary education. In Cambodia, only especially considering the majority of pupils who 35.9 percent of 3-5 year olds were enrolled in do not enroll in early childhood education and thus early childhood education during the 2014-2015 miss out on the prime period for child brain growth. academic year, with enrolment especially low among This problem is compounded by double shifting, the bottom 40 percent (Ministry of Education, 75 Youth and Sports, 2015). The 2016 baseline for poor and in rural areas, with 82-90 percent of the a World Bank impact evaluation of 2-4 year old bottom 40 percent of households in 2012 practicing children finds that children’s scores for literacy, open defecation (WHO and UNICEF, 2015). High numeracy, cognitive, non-cognitive, and motor exposure to fecal matter is associated with a skills all improved when children were enrolled subclinical condition disorder of the small intestine in any school; however, this benefit was offset by known as tropical/environmental enteropathy which reductions in scores of 30-50 percent for children affects a child’s ability to absorb and utilize nutrients who were stunted. These findings of impaired ability (Humphrey, 2009). are supported by global literature showing that children who survive early life undernutrition have Poor dietary diversity—due to both income- been exposed to factors associated with cognitive related food insecurity and socio-cultural factors— delays (Qian, Wang, and Watkins, 2005), which have also contributes to high levels of stunting. lifelong impacts on educational attainment and Cambodians rely mainly on fish and rice for their daily productivity. Malnutrition contributes to low human dietary energy sources. Over time, the proportion capital accumulation, undermining investments in of calories available from rice has declined from 78 health and education by increasing susceptibility to percent of total calories available per person per day infection and lowering pupils’ ability to learn (World in 1992 to 63 percent in 2011,48 as more diverse foods Food Programme, 2013). have been introduced into the food system. Additional calories are available from fish, sugars, oils, and pulses, Maternal and child malnutrition is widespread in whereas increases in the supply of vegetables, fruits, Cambodia, particularly among the poor. About 1 and other non-seafood animal source foods has been in 3 children under age 5 is stunted, exceeding the more limited. This is particularly true in the Northeast, WHO threshold for ‘high’ stunting (and is higher where poverty and food insecurity remain more of a than comparator countries such as Vietnam).47 limiting factor for achieving optimum nutrition than Furthermore, nearly 10 percent of children under elsewhere in the country. Nationally, 22 percent of age 5 experience acute malnutrition (or wasting), households in the poorest wealth quintile experience and more than half of children 6-59 months of age inadequate dietary diversity compared to only and pregnant women are anemic. As in many other 4.8 percent in the richest. The prevalence of food CHAPTER 4: Constraints to household economic mobility countries, poverty contributes to malnutrition, and adequacy in Cambodia at an average of 23 percent stunting among the poorest Cambodian children is in 2014-2016, is above the average for lower middle- much higher than among the better-off. About 42 income countries (21 percent).49 percent of children under age 5 in the poorest quintile were stunted, compared to 18.5 percent of children Evidence suggests that it is not only income but in the top quintile (Figure 34, left panel). Recent also socio-cultural factors that limit the provision research estimated that inadequate breastfeeding of a nutritionally adequate diet for Cambodian alone costs Cambodia 0.08 percent of GNI annually infants and young children. Achieving adequate (Walters et al., 2016). dietary diversity and food security at a household level does not necessarily yield improved diets for Lack of access to improved water and sanitation infants and young children: in households with is a major cause of stunting. Cambodia lags behind adequate dietary diversity, 56 percent of children did its peers in provision of these services (Figure 34, not consume diverse diets (compared to 77 percent of right panel), and access is much lower among the 48  Food and Agriculture Organization of the United Nations (FAO). 2015. FAOSTAT: Food and Agricultural Price Statistics. 47  World Health Organization, Global Database on Child Available from: http://faostat.fao.org (accessed 5 June 2015). Growth and Malnutrition (2016). 49  FAOSTAT, 2017. 76 Inclusion Figure 34. Prevalence of stunting is higher among the poor, and Cambodia lags behind other countries in access to improved water and sanitation facilities Prevalence of stunting, height for age Percentage of people with access (% of children under 5) to improved water and sanitation Vietnam Bangladesh (2010) Guatemala Philippines (2013) Nicaragua Guatemala (2014) Philippines Cambodia Vietnam (2014) L-MICs Bangladesh (2014) Cambodia 0% 10% 20% 30% 40% 50% 60% 70% 80% 0% 20% 40% 60% 80% 100% Top quintile Bottom quintile Improved sanitation Improved water Source: UNICEF; WHO/UNICEF Joint Monitoring Program. children in food-insecure households). A 2013 study leads women to relocate to urban areas, leaving of current infant and young child diets in Cambodia their children in villages with grandparents, other demonstrated that the ‘best diet’ for children ages family members, and caretakers. After controlling 6-8 months and 9-11 months required increasing for education and economic status, children of servings of animal-source foods, vegetables, formally employed mothers were more likely to fruits, and bakery products above the median be stunted than those whose mothers were not consumption and decreasing servings of rice below formally employed, which could be due to several median consumption. Even so, this ‘best diet’ failed factors. A 2016 study found that only 65 percent of to achieve recommended intakes for key nutrients. garment sector employees with children live with CAMBODIA: Sustaining strong growth for the benefit of all In this context, interventions to improve household these children (ILO, 2016), and women often face incomes and behaviors would be insufficient to constraints to take full maternity leave (National achieve optimum diets for young children. Additional Nutrition Program, UNICEF, and HKI, 2017). Managing micronutrient interventions, interventions to the tradeoffs and ensuring that spouses, relatives, or improve market access to nutrient-rich animal- other caregivers can provide adequate childcare is a source and formulated complementary foods, and major challenge for these households. strong social and behavior change messages to encourage changes to traditional dietary practices, The low availability and coverage of nutrition are needed to achieve these health outcomes. services through the health sector are barriers to reducing child malnutrition. Although there have New dynamics related to employment and labor been general improvements in health service delivery, migration, time use, and childcare are emerging policy attention to nutrition has not translated as important contributors to child malnutrition in into financing and implementation of programs Cambodia. Young women in Cambodia face difficult at scale. The RGC’s priority nutrition interventions tradeoffs between childcare and working to provide have achieved only limited scale: only 57 percent of for their families. The high labor force participation pregnant women received the recommended dose of women, especially in the garment industry, of iron-folic acid supplementation during pregnancy, 77 and only 9 percent of children with severe acute While the expansion of health equity funds malnutrition are treated. Although health workers (HEF) could help increase utilization of public are a trusted source of information, they currently health services and lower OOP expenditures, provide little and/or inappropriate nutrition challenges in design and implementation remain. advice to patients despite the regular and nearly An evaluation of the HEF shows that beneficiaries universal opportunities offered by antenatal and were twice as likely to utilize public health facilities immunization contacts.50 Current support to the sub- compared to the near-poor, and receipt of free sector is often provided by development partners treatment was the main factor driving beneficiaries through a project-based approach. Bottlenecks to use public services. However, the same study include: low human resource capacity, constraints in found that only one-third of HEF beneficiaries who procurement of nutrition supplies and supply-chain sought outpatient services and about half of those management, poor motivation of village health who sought inpatient services actually used their volunteers and health center staff, and the absence HEF cards for these services. The main reasons for not of a well-functioning nutrition information system doing so were quality of care and access (distance (CARD, 2014). or cost of transportation and non-acceptance of HEF cards at some public facilities), but others were Exposure to health and environmental simply not aware of the HEF benefits. This indicates shocks compounds challenges to achieving challenges in the design and implementation of the socioeconomic mobility HEFs as well as concerns about the poor quality of public health care delivery. Compounding low asset ownership is the high level of household vulnerability due to high Extreme weather events are another source exposure to shocks, of which health shocks are of shock for Cambodian households. In 2015, among the most significant. While the incidence Cambodia was ranked the eighth most disaster- of illness has declined, about 15 percent of the prone country in the world by the United Nation’s population still reported having been ill in the four- World Risk Index (Figure 35). Frequent disasters are week period before they were interviewed in 2014.51 a major source of catastrophic spending, pushing Many of them (83 percent in rural areas and 92 percent non-poor households into poverty and making it CHAPTER 4: Constraints to household economic mobility in Phnom Penh) seek medical care and face high more challenging for poor households to eventually out-of-pocket (OOP) expenditures. Approximately escape poverty. For instance, based on a 2013 post- 6.3 percent of the population had catastrophic flood needs assessment, average monthly incomes spending in 2013, and 3.1 percent had to incur debt of those affected dropped more than 25 percent, to pay for health expenditures. The impact is even amounting to USD 37.6 million, with (mostly rural) greater for the elderly and disabled, among whom households reliant on agriculture for income and 8.6 percent and 13.4 percent incur catastrophic food experiencing the most severe consequences spending, respectively. Indeed, OOP payments for (RGC, 2014a). Although some of those who managed health services in Cambodia are among the highest to maintain their average monthly incomes did so in the world, at 60 percent of all health expenditure.52 through alternative livelihoods, about 71 percent of households interviewed took out a loan after the flood as a coping mechanism (RGC, 2014a). 50  Doctors are found to routinely encourage the use of Finally, these disasters have also had indirect health formula milk in hospitals (National Nutrition Program, UNICEF, HKI 2017). consequences from contaminated drinking water 51  Cambodia Socio Economic Survey, National Institute for and the overflow of sanitation and sewerage systems Statistics. caused by flooding. In addition to the estimated USD 52  Global Health Expenditure Database, World Health Organization. 2.7 million loss in water and sanitation infrastructure 78 Inclusion caused by the 2013 flood, the total average annual institutional capacity to deliver services effectively, economic loss of poor sanitation in Cambodia is patronage, and inadequate attention to demand- estimated at USD 448 million per year, or USD 32 side constraints in access to services. These issues are per capita (WSP, World Bank, 2008). Overall, the discussed in greater detail below. underdevelopment of the insurance industry is a constraint to helping the population and the poor Public investment in social services in post- protect themselves against the risks of loss of assets, conflict Cambodia has been suboptimal, death of relatives, unemployment, sickness, car leading to persistent gaps in service provision. accidents, natural disasters, and so on. Government-funded education expenditure, traditionally low, has significantly increased in recent Challenges in public service delivery affect years, from 1.6 percent of GDP in 2012 to 2.1 percent human development outcomes of GDP in 2015; this has been complemented by donor financing, amounting to 0.6 percent of GDP Strengthening public services will be critical for in recent years, while remaining significantly below raising household endowments. The inadequacy the average for lower middle-income economies (4.3 of key services and below-average quality—to percent of GDP in 2010). Government-funded public some extent a legacy of the Khmer-Rouge conflict— health expenditure in Cambodia has averaged close meant Cambodia had a much larger catch-up to 1.4 percent of GDP in 2010-2014, compared to gap with other countries in the region. These low an average of 1.6 percent of GDP in lower middle- initial conditions have shaped the development income economies. Consequently, private spending of human capital and service provision since then. constitutes 80 percent of total health spending, However, current systemic issues also include poor which is a significant burden on households and contributes to their vulnerability, as discussed above (Sánchez-Martín et al., 2016). Figure 35. Compared to other countries, Cambodia is highly exposed and vulnerable While public spending in social sectors has been to disasters increasing, there is room to further improve World Risk Index, Top 20 the allocation of resources and the alignment CAMBODIA: Sustaining strong growth for the benefit of all with priorities identified in sectoral plans. The Vanuatu Tonga budget mainly goes toward salaries and wages, Philippines so development of social services infrastructure Guatemala Solomon Islands or provision of other inputs has lagged behind Bangladesh the country’s needs. In the education sector, total Costa Rica Cambodia budgeted expenditure in 2017 has risen to 3 percent Papua New Guinea of GDP. However, 80 percent of the budget goes to El Salvador salaries and wages. While the Education Strategic Timor-Leste Brunei Darussalam Plan (ESP) 2014-2018 places an emphasis on early Mauritius childhood education, only an estimated 0.7 percent Nicaragua Guinea-Bissau of the budget is allocated for early childhood Fiji development (ECD), even though enrollment is Japan rising. Cambodia also faces a major challenge in Vietnam Gambia the skills and competencies of its health workforce, Jamaica but only a small share of public spending goes to 0 5 10 15 20 25 30 35 40 pre-service and in-service training improvements or Source: United Nations University (2015). competency-based training (Sohnesen et al., 2016). 79 Investment in service delivery beyond health GDP.54 Social assistance (excluding scholarships and education has generally been low, as and subsidized health insurance) covers less than illustrated by the fact that more than 40 percent 2 percent of the poorest quintile of the population. of Cambodia’s population still has no access to Although a few social assistance programs already electricity. While access to electricity has improved exist and have been tested successfully (CCTs, public significantly, it remains low relative to other works, food assistance, social pensions), they are countries in the region (Figure 36), particularly for pilots or feature partial coverage and mostly depend rural areas where only about half of the population on donor financing. Social assistance schemes thus has access to electricity from alternative off-grid remain limited, although the situation is expected sources or grid-supplies, compared to nearly to start changing with implementation of the 100 percent in urban areas (Climate Investment new Social Protection Policy Framework (SPPF) Funds, 2016). Moreover, access does not ensure beginning in 2017. The poor, informal workers, and affordability, particularly for the poor. Although the unemployed do not currently receive any form authorities have introduced subsidized life-line of social or subsidized access to pensions as social tariffs for grid-connected households who consume security benefits mainly cover civil servants (National less than 50 kWh per month,53 in the lowest Social Security Fund for Civil Servants), members of consumption category, electricity expenditures the military (National Fund for Veterans), and formal represent as much as 30 percent of household private sector workers (National Social Security disposable income. Improved electricity access has Fund), though benefits are modest. One noteworthy also come with negative externalities that have positive feature in social protection is the existence had significant impacts on the bottom 40 percent, in particular, as the expansion of hydropower endangers the flow of soil nutrients (vital for Figure 36. Although access to electricity agriculture) and migratory fish. has improved, Cambodia still ranks second lowest in the region Social protection spending is among the lowest Population with access to electricity in the world, despite the potential to address demand-side constraints to access to services and 100% Access to electricity (% of population) 90% CHAPTER 4: Constraints to household economic mobility minimize vulnerability. Demand side constraints to 80% equitable access to services or attainment of human 70% development outcomes in Cambodia are numerous. 60% Catastrophic health expenditures are a drag on Cambodia (2000-2014) 50% welfare improvements, the need/desire to work Myanmar (2014) 40% Malaysia (1990-2015) can lead to school drop-outs, and lack of resources 30% Lao PDR (1995-2013) contributes to inadequate dietary intake among the 20% Indonesia (1990-2015) poor. Social protection programs can help address 10% some of these constraints, yet Cambodia invests 0% 0 5000 10000 15000 20000 25000 30000 less than 0.1 percent of GDP in social assistance, GDP per capita, PPP (constant 2011 international $) compared to the world average of 1.6 percent of Sources: World Bank and IEA, 2015, Progress Towards Sustainable Energy; Cambodia Demographic and Health Survey, 2015. ADB, 2015, Achieving Universal Electricity Access in Indonesia. IEA, 2015, World Energy Outlook; World Bank, 2012, Lao PDR – Power to the People; Castalia 53  For EDC customers connected to the national grid, the Strategic Advisors, 2014, Myanmar NEP Roadmap and Investment tariff in 2016 is USD 0.15/kWh for urban consumers for less than Prospectus; World Bank, 2011, The Rural Electrification Experience. 50 kWh/month, and USD 0.17/kWh for consumption between 51-200 kWh/month. For rural consumers, the life-line tariff is USD 0.12/kWh for consumption below 10 kWh/month and for 54  ASPIRE database. Accessible at datatopics.worldbank. water pump stations in the agricultural sector. org/aspire/. 80 Inclusion of a central targeting mechanism, ID-Poor, which for private practices; in the process, rural areas are left continues to be the main tool for registering the behind. In response, the introduction of pilot Service poor across Cambodia and is fully managed by the Delivery Grants (SDGs) introduced a performance Ministry of Planning. evaluation mechanism to district facilities that is expected to improve patient access as well as overall Although the foundation of an effective state quality of service. has been developed, public service delivery is still uneven and non-systematic. As mentioned Three key and interrelated reforms are central earlier, the efforts to construct a rational legal to improving service delivery in terms of bureaucracy developed in parallel to (but with access, quantity, and quality: public financial far less effect than) the consolidation of authority management, civil service, and decentralization around elite patronage networks. This century-old reforms. Public sector services fail poor people for patron-client relationship is a reciprocal (although a number of reasons. First, services may be outright unequal) relationship that involves exchanges of inadequate due to lack of budget, and when budget personal favors and was nurtured alongside the is available, the existing institutional arrangements formal bureaucracy to provide crucial power based may not allow the efficient use of public resources. on off-budget resources (Un, 2005; Hughes and Un For example, long delays in funds flow to frontline 2011). The product was a hybrid polity, which is service providers often result in non-delivery of characterized by the coexistence of a rational legal services. Second, the presence of public service arrangement and a personalized network of patron- facilities may not always guarantee that services are client relationships. The lack of institutionalization delivered due to lack of attention by inadequately of services in the hybrid political system results in incentivized civil servants. Third, lack of citizens’ practice in a high cost for the citizens to benefit from voice in the way public services are delivered due public services, given that in many cases they need to highly centralized public service management to resort to primary relations or informal payments. often leads to non-delivery or poor quality of public This speaks to the capacity of state institutions to services. Successful public financial management, deliver public services, which requires significant civil service, and decentralization reforms would upgrading to satisfy the changing needs of the help tackle challenges in these three dimensions, CAMBODIA: Sustaining strong growth for the benefit of all Cambodian people. leading to a well-managed public sector that delivers services for citizens and facilitates businesses Wrong incentives and limited capacity also through good management of infrastructure and hamper public service delivery and have other public investment, regulations on social and contributed to poor-quality services. For instance, economic behavior, adoption of sound policies, in the health sector, the increase in hospitals and and support of fiscal and institutional sustainability health care centers have not yet guaranteed that (World Bank, 2003; Blum, Manning, and Srivastava, Cambodian citizens have access to quality of care. A 2012). Although Cambodia has made substantial 2014 study suggested that approximately “74 percent progress in the three areas to date, daunting of all patients would potentially be mismanaged challenges persist. [wrong diagnoses and treatment]” (World Bank, 2014b). Inadequate incentives and performance While the start of decentralization reforms in management for frontline service providers cause 2002 has led to some improvement in public health workers to resort to dual practice (i.e. working service delivery and citizen engagement at as employees of public health facilities and offering the grassroots level, progress at the national private consultation at the same time) and to move level remains limited. The introduction of to urban areas where there are more opportunities local elections through the decentralization and 81 deconcentration reforms has helped open up space ministries.55 Functional transfers are intended to for multiple-party engagement in local politics. shift responsibility for the quality of service delivery Decentralization has produced “new attitudes and closer to the service providers, allowing subnational practices” at the local level, mainly an increase in administrations to be more responsive to the specific inter-party collaboration (Ninh and Hank, 2005; needs of their citizens. However, only two ministries Rusten et al., 2005). In addition, decentralization have so far identified and transferred some functions has increased collaboration between local to the district/municipality level. Even as such government and non-governmental organizations transfers take place, line ministries have taken limited (NGOs), resulting in improved service delivery and steps to provide the financial resources, training, and thereby generating further demands by people procedural guidance to fully equip the subnational to their elected councilors (Rusten et al., 2005). staff to perform their new roles. Citizen engagement around the financing and delivery of public services is growing at the local The introduction of a Public Financial level, with the district roll-out of reporting on Management (PFM) Reform Program has led to budgets, expenditures, and services delivered at the overall improvement in country systems, health centers, primary schools, and Commune while further efforts towards program budgeting Councils. In contrast, engagement at the national implementation will be key to ensure the level—particularly around budget information—is success of decentralization reform. A Financial limited. According to the 2015 Open Budget Index, Management Information System (FMIS) is under national budget openness was assessed to be very implementation—currently operational at the low, “scant or none,” with a score of 8 out of 100 Ministry of Economy and Finance (MEF) including (down from 15 in 2013)—the lowest score in East all provincial treasuries—to support the timeliness Asia and the Pacific except for Myanmar. of payments and accuracy in financial reporting. Nonetheless, a host of issues still constrains the Resources and responsibilities are being public sector’s ability to deliver core public programs progressively transferred to subnational levels, and services based on stated national priorities but finances for development investment fall and, importantly, its ability to demonstrate the well short of local needs, capacity is inadequate effectiveness of these programs and services at the CHAPTER 4: Constraints to household economic mobility for fulfilling new functions, and national ministry most reasonable cost. Payments are sometimes support is uneven. Annual unconditional transfers delayed because cash is not immediately available for the district/municipality and commune/sangkat due to the way in which the cash is managed, levels (two levels of subnational administration how revenues and expenditures are recorded and below the province) represent a 1 percent and 2.8 accounted for, and inadequate discretion for budget percent share of 2016 national current expenditure, managers to utilize budget at their disposal. While the respectively. While allocations to the subnational introduction of program-based budgeting in 2015 is levels have generally improved over the years, the expected to help improve expenditure allocation and amount of funding remains small and is consumed outcomes, a number of challenges remain, including largely by administrative expenses. As a result, disconnects between priorities in sector strategic only a few proposed development projects in each plans and requests for budgeting, lack of integration commune/sangkat  are funded, and almost no development investments are financed at the district/ 55  Management of solid waste and sewerage, early municipality level where 71 percent of the funding childhood education, primary education, and non-formal is devoted to staff costs. In terms of transferring education have been transferred to the district/municipality level, with an ambitious target of 14 ministries set by the functional assignments to the subnational level, National Committee for Subnational Democratic Development progress has been slow and highly uneven across for 2017. 82 Inclusion of donor funding into program budgeting, and Administration Reform (2015-2018) has increased the institutional inertia influencing the definition of minimum wage across the public sector, improved programs. Another set of limitations includes weak incentives for teachers and health care workers procurement systems and management capacity, (including location-based allowances to encourage lengthy payment processes, weak internal controls, remote postings), and ensured timely salary payment lack of transparency and non-availability of credible through the use of the banking system and automatic financial information, weak external oversight, and tax deductions for salary beyond certain thresholds. slow adoption and implementation of international The minimum salary in the public sector increased standards. Lengthy processes continue to hamper from approximately USD 80 a month in 2013 to USD timely in-year budget disbursements, affecting the 160 a month in 2015 and is expected to reach USD 250 ability of the recently created budget entities to by 2018. However, ensuring that civil service pay and deliver quality public services (RGC, 2015b). non-material benefits are sufficiently competitive to attract, retain, and motivate professionals of Thus far, civil service reform has introduced various key skill sets remains a major challenge. For salary increases but challenges remain example, a 2014 study finds that “the best students in providing incentives to attract skilled are not attracted to teaching” and that “most teacher professionals into the civil service, as well as in trainees scored in the E, D, and C ranges on the grade actual performance monitoring. Decentralization 12 exam” (Prateek, and Fukao, 2015). Even if better efforts would need to be accompanied by sufficient professionals were to be attracted through the salary funding for competencies and services transferred increases or additional incentives, performance to the subnational level, as well as by an adequate monitoring and citizen feedback mechanisms in endowment of human resources that are well Cambodia are weak and need to be strengthened incentivized and also subject to monitoring and for actual improvements in efficiency and quality of evaluation. The National Program for Public public service delivery to materialize. CAMBODIA: Sustaining strong growth for the benefit of all 83 Chapter 5 Is the current development model sustainable? Even if a large share of the emerging agenda The ratio of grants to total revenue in Cambodia is addressed effectively, developing countries is significantly higher than the average for lower like Cambodia remain vulnerable to large middle-income economies (Figure 37, left panel). unanticipated external and internal shocks, However, following a sharp increase in the aftermath with slow recoveries that could affect the growth of the global crisis, grants have been dwindling: aid and development agenda for the next decade grants received by Cambodia declined from around substantially (Rodrik, 1999; Cerra and Saxena, 2005; 5 percent of GDP in 2010 to 2 percent of GDP in 2015, Reddy and Minoiu, 2006; Hausmann et al., 2006).56 the year in which the country graduated from low- This section discusses the real and ongoing threats income status. to social, environmental, and economic sustainability which could constrain growth and household To compensate for the decline in grants, Cambodia CHAPTER 5: Is the current Development model sustainable? economic mobility going forward. has achieved outstanding improvements in tax collection over the past five years and is now 5.1 Risks to the sustainability of above the average for lower middle-income countries. Cambodia has increased efforts to boost macroeconomics and public finances tax revenue through implementation of the Revenue Mobilization Strategy launched in 2014, with Although public finances remain sustainable, emphasis on strengthening the tax administration, maintaining public investment levels will including improved implementation of import become more challenging tariffs, anti-smuggling efforts, arrears collection, and enhancement in tax compliance with a focus Cambodia has traditionally had a high reliance on tax audits and taxpayer services. These efforts, on aid, although the grant component declined coupled with fast economic growth, have helped as a percentage of total revenue in recent years. lift tax revenue from around 10 percent of GDP in 2010 to an estimated 13.8 percent in 2014. This has 56  Developing countries are found not only to be more allowed Cambodia to catch up with and surpass the vulnerable to large internal and external shocks but also to average for lower middle-income economies (Figure take a longer time to return to their pre-shock trend growth rates. There is an emerging literature on growth collapses. 37, right panel). 86 Sustainability On the expenditure side, a programmed fourfold the public payroll already represents around 40 increase in the public sector wage may eventually percent of revenue. Notably, while the number of result in fiscal pressures. Following the 2013 civil servants (2.9 percent of total population) is well election, the RGC announced the public sector below the averages for low-income economies (4.0) minimum wage will reach USD 250 per month by 2018, and East Asia and the Pacific (4.4), the ratio of public amounting to close to 9 percent of GDP (compared administration wage relative to GDP per capita (3.1) to USD 80 per month in 2013). While traditionally is already among the highest in the world (Sánchez- below the level of neighboring countries, the rising Martín et al., 2016). wage bill in Cambodia (estimated at 7.2 percent of GDP in 2016) is already on par with the average for Cambodia has traditionally relied on donor low-income economies (7.0 percent; Table 7). This funding, currently in decline, for infrastructure could eventually pose budgetary pressures, since financing. At low levels in the 2000s, public Figure 37. Cambodia has achieved impressive progress in revenue collection, at a time when grants are dwindling Grants to total revenue Tax revenue as percentage of GDP 50% 20% Percentage of total revenue 40% 15% 30% 10% 20% 5% 10% 0% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CAMBODIA: Sustaining strong growth for the benefit of all Cambodia Lower middle-income Bangladesh Cambodia Guatemala Bangladesh Nicaragua Philippines Lower middle-income Nicaragua Philippines Source: World Development Indicators. Table 7. Public sector wage bill for selected country groups, latest available year Public sector payroll % of GDP % of government expenditures % of government revenues Cambodia 7.2 32.5 41.0 Asia and Pacific 6.6 27.5 22.9 Low-income 7.0 25.8 26.8 Middle-income 8.7 31.8 28.2 European Union 9.9 25.4 25.3 High-income 10.4 28.0 25.9 Source: Cambodia’s 2016 budget and IMF. 87 capital expenditure in Cambodia was boosted in issues delayed actual contracting for the FMIS until the aftermath of the global crisis, partly thanks to December 2013. While the FMIS is now the system a significant increase in donor-financed capital. of record at both the center and the Phnom Penh Externally financed public capital expenditure provincial treasury, some difficulties remain at other increased from 4.6 percent of GDP in 2008 to 8.2 provincial treasuries related to the lack of timely percent of GDP in 2011, then progressively declined detailed budget breakdowns provided by the to an estimated 5.3 percent of GDP in 2015 (Figure provincial finance departments, which encourages 38, left panel). Meanwhile, locally financed capital the continued use of parallel systems. Further expenditure has hovered around 2 percent of GDP efforts to ensure the success of the reform include in recent years and has traditionally been allocated providing additional capacity building to promote mainly to smaller-scale road and hydraulic projects. greater confidence in and encourage usage of FMIS, streamlining processes, and introducing proactive Although public capital spending in Cambodia change management when required. is high by regional standards, there are concerns about its sustainability and maintenance. Effective implementation of program-based Cambodia has been able to meet the capital budgeting appears to be the next step in expenditure goals set in the National Strategic strengthening the link between medium- Development Plans (NSDP), but the maintenance term policy priorities and the budget. Program budget has not kept the same pace of nominal budgeting has been extensively piloted in ten expansion as that of domestically financed Ministries, extended to budget entities in 2015, capital spending (Figure 38, right panel), not to and will be rolled out to provincial departments mention externally financed infrastructure. High in 2016.57 Fiscal aggregates are now prepared for fragmentation in aid efforts hampers the quality a three-year rolling timeframe based on bottom- of investment and results in authorities spending a up budget strategic plans (BSPs) that attempt to large share of their time on meeting missions and better link the National Strategic Development reporting (Chanboreth and Hach, 2015). Enhancing Plan and sector-specific priorities to the medium- donor coordination, avoiding a piecemeal approach term expenditure framework (MTEF) and annual to project selection, strengthening public investment budget. Efforts have been made to gradually CHAPTER 5: Is the current Development model sustainable? management for domestically financed projects, and improve costing and set more realistic outcome and ensuring adequate operations and maintenance output targets, but progress remains uneven, and budgets are needed to guarantee that large public further improvements are needed before program capital expenditure translates into good quality budgeting and BSPs can be considered fully effective. infrastructure. Current limitations of program budgeting include: a systematic approach to program evaluation is At the same time, a series of capacity and lacking; major elements of the budget are missing sustainability challenges in PFM reform may from program budgeting, including staff costs and hamper the effectiveness and efficiency of capital projects; and budget strategic plans lack public spending. The second phase of PFM reform, realism and robust input-output/outcome linkages. launched in 2008, focused on establishing a Financial Moreover, strategic sector planning remains Management Information System (FMIS) that would help enhance transparency, predictability, and 57  Fifteen more line ministries are to be added in 2016, oversight during budget implementation. A series with the final three ministries to be included in 2017 for the of improvements have been made in arrear payment 2018 budget. The main elements of the program budget system are a three-year rolling budget, strategic plans that elimination and consolidation under a Treasury identify programs, and annual program budgets and outturn Single Account. However, a series of procurement statements. 88 Sustainability Figure 38. Public capital spending has been declining as a percentage of GDP since its peak in 2011, and expenditure in maintenance may not be sufficient Public expenditure as % of GDP Domestically financed investment and maintenance 25% 1600 1400 20% 1200 Percentage of GDP 15% 1000 Billion riel 800 10% 600 400 5% 200 0% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Externally financed capital Locally financed capital Maintenance Capital Investment Provinical expenditure Wages Other current Source: World Bank Staff calculations using TOFE (Ministry of Economy and Finance). Note: “e” denotes that figures for 2015 are based on preliminary estimates. weak, and the MTEF has not been fully developed Macro-financial vulnerabilities are rising due yet (RGC, 2015b). In addition, in most ministries, to a credit boom domestically and externally financed budgets have not yet been integrated, including both current and Strong economic growth in Cambodia has been capital spending. underpinned by fast broad money growth under dollarization. In the late 1980s and early 1990s, These risks notwithstanding, Cambodia has Cambodia relied on domestic banks to finance its CAMBODIA: Sustaining strong growth for the benefit of all been one of the few developing countries able public sector deficits, which resulted in high inflation to implement countercyclical fiscal policy in and encouraged the use of other substitution recent years, and public finances are expected currencies. The arrival of UNCTAD in 1992 and the to remain sustainable. After several years of fiscal opening up to foreign aid and investors resulted in consolidation, expansionary fiscal policy resumed large inflows of U.S. dollars, displacing the Khmer in 2016, mainly driven by the public wage bill, and riel (KHR) as the primary currency in just a few the overall fiscal deficit (after grants) is expected to years. Dollarization has also led to the second- widen slightly to 1.2 percent of GDP in 2016. In the fastest broad money growth rate observed among coming years, the deficit after grants is expected peers (Figure 39). These days, the share of foreign to stabilize around 3 percent of GDP, assuming a currencies in broad money hovers around 80 business-as-usual scenario. Cambodia’s debt distress percent, and the share of U.S. dollar deposits to total rating in the latest WB/IMF Debt Sustainability deposits has remained above 90 percent for the past Analysis remains low, with the ratio of public debt to two decades. GDP at 32.5 percent as of end 2015 (IMF, 2016). Most of the outstanding debt has concessional terms, The high levels of dollarization in Cambodia although bilateral debt (especially from China) has have so far been supportive of growth and been rising over time. macroeconomic stability, although the poor 89 Figure 39. Dollarization has driven fast beneficial for an economy that was exporting money growth intensely to the United States, the limitations of dollarization have become apparent with the Average broad money growth, 1993-2015 European Union becoming the main trading 30% partner. Recent U.S. dollar appreciation vis-à-vis the Euro and other currencies has eroded Cambodia’s 25% external competitiveness, dis-incentivizing the % growth, year-on-year 20% production of tradable goods and making trips to Cambodia more expensive for non-American 15% tourists. Contrary to other economies in the region, 10% this has also led to persistent current account deficits (Figure 40) which tend to be motivated 5% by demand for import of consumption goods, 0% including investment in non-tradable goods such Philippines Guatemala Bangladesh Cambodia Vietnam construction, land, and real estate. Cambodia Source: World Development Indicators. depends on large FDI, at around 10 percent of GDP in recent years, and foreign aid inflows to finance are more exposed to a potential currency crisis. this external gap. In addition, dollarization prevents Dollarization is mainly an urban phenomenon, with the effective use of interest rate policy, restrains FDI, garment exports, and tourist receipts benefiting seigniorage gains from printing money in local mostly urban areas, while the riel-based rural currency (World Bank, 2015b), and hampers the economy has lagged behind to some extent (Duma, ability of the Central Bank as lender of last resort. 2011). Better access to financial institutions and Nonetheless, Cambodia’s foreign currency reserves higher likelihood of foreign currency income explain of USD 6.4 billion (or 5.4 months of imports) as of higher foreign currency holdings in urban areas mid-2016 are considered adequate according to (Siregar and Chan, 2014). The poor have a higher the latest IMF Article IV Consultation and would degree of exposure to exchange rate fluctuations serve as a buffer in case of an external shock. (Lay, Kakinaka and Kotani, 2010), although the Khmer CHAPTER 5: Is the current Development model sustainable? riel is de facto softly pegged to the U.S. dollar,58 which Large inflows and deposits in foreign currency provides a nominal anchor for economic agents have been supportive of booming credit and underpins stable prices. It also discourages the growth. Capital account openness and ease for public sector from resorting to domestic financing foreign financial institutions to access funds from and money printing in excess (World Bank, 2015b). headquarters, current account deficits leading to Dollarization prevented Cambodia from suffering large foreign currency inflows, and large tourism a major currency depreciation such as that receipts coupled with the lack of developed capital experienced by Thailand and Malaysia during the markets in Cambodia have led to fast foreign 1998 Asian financial crisis. currency deposit growth (averaging close to 25 percent growth year on year during 2010-2015). At the same time, dollarization hampers the This has fueled one of the fastest capital deepening ability of authorities to make effective use of episodes in the region, with Cambodia’s credit to monetary and exchange rate policies. While private sector as a percentage of GDP jumping from 2 eliminating exchange rate risk has been highly percent in 1993 to 63 percent in 2015, already above the average for lower middle-income economies. Only Vietnam has sustained a faster rate of credit 58  The currency has been fluctuating between KHR 4,000 and 4,100 per U.S. dollar since 2011. growth in the same period (Figure 41, left panel). 90 Sustainability Figure 40. Dollarization has resulted in persistent current account deficits Current account balance 20% 15% 10% % of GDP 5% 0% -5% -10% -15% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Cambodia Bangladesh Malaysia Philippines Thailand Vietnam Source: World Development Indicators. Outstanding credit is dominated by trade the banking system reached 54 percent of GDP in activities, although the share of construction and 2015 and served 2.3 million borrowers, compared real estate is increasing. Following a sharp decline to 27 percent of GDP and just over a quarter million in construction activity in the aftermath of the 2009 borrowers in 2010 (World Bank, 2016b). The banking global crisis, credit to construction, real estate, and system remains concentrated, with the five major mortgages increased from around 4 percent of banks accounting for more than half of all banking GDP in 2010 to an estimated 13 percent of GDP as sector assets, and there is a need to further develop of 2015, or around 20 percent of total outstanding the financial sector infrastructure. Borrowing costs credit to the private sector. In contrast, loans to have been reduced substantially, with the weighted the manufacturing sector have flattened since average of short-term lending rates dropping from 2013, remaining around 5 percent of GDP. In 2014 22.4 percent per year in 2010 to 11.6 percent per CAMBODIA: Sustaining strong growth for the benefit of all and 2015, nominal credit growth in construction, year in 2015. However, the wide interest rate spread real estate, and mortgages and in retail trade and between deposit and lending rates (7 percent as personal lending has been above 30 percent, while of February 2016) indicates inefficiencies in the growth in manufacturing has stayed at around 7 financial market, with heightened profitability for percent (Figure 41, right panel). This is probably financial institutions at the expense of higher costs explained by the abovementioned decline in for other economic agents. external competitiveness and disincentives to invest in tradable goods under U.S. dollar appreciation. Fast The expansion in microfinance institutions credit growth with increasing exposure to the supply- (MFIs) has been even more remarkable, driven boom in the real estate and construction providing access to finance for a segment of sectors is associated with rising macro financial risks the population that would otherwise have to (Ahmed et al., 2014; IMF, 2016). rely on unregulated private money lenders, although Cambodia remains a predominantly Although the rapidly expanding banking cash economy. Since the global financial crisis, system supports economic growth and access both assets and credit at MFIs have been growing to finance, the wide interest rate spread points at rates of more than 40 and 50 percent a year. The to inefficiencies. Outstanding credit granted by 50 MFIs and eight micro-deposit-taking institutions 91 Figure 41. Cambodia has had one of the fastest capital deepening episodes among its peers, driven by construction and retail Credit to private sector Nominal credit growth rates, by sector 120% 100% 100% % growth, year-on-year 80% 50% % of GDP 60% 40% 0% 20% 0% -50% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2009 2010 2011 2012 2013 2014 2015 Cambodia Lower middle-income Vietnam Construction and real estate Manufacturing Agriculture Nicaragua Guatemala Philippines Bangladesh Retail trade and personal lending Other services Source: World Development Indicators, National Bank of Cambodia. lent a record high of USD 2.9 billion in outstanding MFI outstanding credit in Phnom Penh fell from loans in 2015 that reached 2 million borrowers, KHR 7.2 million in 2010 to KHR 6.8 million in 2014, compared with only USD 426 million and 0.9 million credit to other urban areas doubled in the same borrowers at the end of 2010 (World Bank, 2016b). period (from KHR 3.3 to 6.6 million), and credit to The high return on equity (22 percent on average households in rural areas jumped from KHR 1.5 for microfinance institutions) has resulted in tighter to 3.6 million (World Bank, 2015). There does not competition and lending growth, although 10 seem to be a significant difference in the number of percent of MFIs still account for 90 percent of total borrowers per 100 adults between those provinces CHAPTER 5: Is the current Development model sustainable? lending. This has placed Cambodia among the lagging behind in terms of human development top developing countries in terms of percentage and other parts of the country (Figure 42). At the of people who borrowed money from a financial same time, due to lack of financial literacy, enhanced institution during the past year (27.7 percent). access to credit does not always lead households to However, only 3.6 percent of the population ages make appropriate investments that would reduce 15 and above saved at a financial institution, their economic vulnerability. On the contrary, many and just 44.3 percent withdrew money from an households may be over-borrowing and increasing account during the past year—one of the lowest their exposure to risks, and there are signs that the percentages in the world (see Table 16 in Annex market is already highly saturated, given estimated 1). Thus, Cambodia remains a predominantly cash capacity at this level of development (Mimosa, 2016). economy, with people accessing loans from MFIs Notably, the National Bank of Cambodia is already but with the majority of the population still being making progress in improving financial consumers’ unable to save. awareness about their rights and responsibilities through the “Let’s Talk Money” campaign launched At the household level, access to finance has in 2015, which represents an important step forward eased as a constraint, but low financial literacy in improving consumers’ capacity for good financial may hamper outcomes and heighten risks. While decision-making. 92 Sustainability Figure 42. Fast penetration of MFI lending A sudden deterioration in asset quality has been has taken place across both better-off and observed recently, with the indicator PAR30 for poorer provinces MFIs (representing loans overdue by 30 days or more) increasing by 80 percent in 2015, although MFI borrowers per adult the indicator remains below 1 percent. The fastest 35 growth in the PAR30 indicator was registered in Kampong the category of social loans, which likely signals 30 Otdar Speu increasing difficulties for the poor and vulnerable Borrowers per 100 adults Meanchey 25 to honor their loans in a context of poor agricultural Ratanak 20 Kiri performance.60 Mondul 15 Stung Kiri Phnom Treng Penh In the context of fast credit growth, the 10 Cambodian authorities have recently introduced 5 a series of macro-prudential measures to 0 improve the resilience of the financial sector. The 0.3 0.4 0.5 0.6 0.7 National Bank of Cambodia recently introduced new Human development index minimum capital requirements for financial sector Source: Mimosa Project and IMF Financial Access Survey. institutions as well as new reserve requirements for foreign borrowing and an increase in the liquidity coverage ratio. These measures seem to have helped Cambodia’s potential indebtedness problem ease the pace of credit growth, from around 27 at the household level seems to be not so much percent during 2015 to 17 percent as of October a case of parallel lending but a case of rapidly 2016, year-on-year. expanding loan sizes. Among surveyed countries, Cambodia has the largest outstanding MFI loans as Overall, while the introduced measures constitute a percentage of GDP (12.1 percent), followed by Peru a positive development, additional actions are (Figure 43).59 The percentage of borrowers with three needed to mitigate the macro-financial risks or more loans (4.5 percent of total as of November associated with fast credit growth. One area of CAMBODIA: Sustaining strong growth for the benefit of all 2015) remains at reasonable levels. However, the concern is weak corporate governance practices in average loan size of MFIs that focus on the poorest both public and private enterprises, partly due to clients in Cambodia now stands at 70 percent of the sub-optimal accounting infrastructure which median annual income, up from 45 percent just two results in limited reliable financial data for financial years ago (Mimosa, 2016). In a decade, average loan monitoring and planning. In addition, there is still sizes have increased from around USD 200 to USD much room for improvement in credit information, 1,000 (Figure 43, right panel), with loans to adjusted including through the inclusion of more and deeper yearly per capita income growing from 12 percent information on income, guarantees, loan structure to 21 percent between 2004 and 2014. Nonetheless, and interest rates, and collateral. Cambodia does the percentage of indebted households slightly not have a deposit protection fund, and the existing declined between 2012 and 2014, from 36 percent insolvency framework is obsolete. The overall to 32 percent. Evidence indicates that the increasing corporate insolvency framework to facilitate and larger loans are in many cases served by the expedite restructuring of private sector debt is pooled income of several household members. 60  “Recent Trends of Credit in Cambodia Financial Sector.” 59  The IMF Financial Access Survey comprised 21 countries Credit Bureau of Cambodia. Presentation delivered by Pascal in 2014. Ly, Chief Executive Officer, on July 11, 2016. 93 Figure 43. Among surveyed countries, Cambodia has the largest outstanding MFI loans as a percentage of GDP, as loan sizes have increased Outstanding loans with all MFIs % of indebted households & loan size 14% 1200 50% 12% 1000 40% 10% 800 30% % of GDP 8% USD 600 6% 20% 400 4% 10% 2% 200 0% 0 0% 2004 2007 2008 2009 2010 2011 2012 2013 2014 14 14 13 11 14 14 20 20 20 20 20 20 ar h so u a a es r di di nm Pe Fa % indebted households loan per household lad bo bo ya ina ng am am M rk Ba C C Bu Source: IMF Financial Access Survey and World Bank staff calculations from CSES 2004-2014. expensive and cumbersome (with a lengthy process women aged 15 years or older is about 8 percentage in the judiciary). If bank failures occur in the future, points lower than for men, but at 79 percent in 2014, Cambodia would face problems not only in paying it is significantly higher than its peers. This gap has back deposits but also in restructuring or resolving been closed among 15-24 year olds, in contrast to distressed financial institutions, a situation that might Cambodia’s structural peers where the gap remains trigger systemic problems in the financial system. high, ranging from more than 14 percentage points in Bangladesh to 30 percentage points in Nicaragua 5.2 Risks to social sustainability and 34.5 percentage points in Guatemala in 2014 for CHAPTER 5: Is the current Development model sustainable? example (WDI, 2016). Participation in the garment While the benefits of economic growth have been sector in Cambodia is high, with women accounting widespread, many people remain vulnerable to for 85 percent of wage employees in the sector. At exclusion and are constrained in their ability to 57 percent, Cambodia also stands out in terms of the overcome development challenges, which poses percentage of firms with a female in top management a risk to the future inclusiveness of growth. according to the latest Enterprise Survey. Attainment of social inclusion and economic participation is desirable not only for individual well- However, significant gender disparities can be being but also for economic growth and social stability. seen in earnings, the quality of jobs, and voice and representation in leadership positions. Only Although a large number of women joined 18.8 percent of non-production jobs are done by the workforce over the past two decades, women (see Figure 44). In the garment sector, for instance, most women are engaged in assembly, significant gender gaps still exist while the higher-paying quality and supervision work is done by men. In terms of political Cambodia stands out in economic participation representation, women account for 20 percent of women. The population-to-employment ratio for of lower house and 16 percent of upper-house 94 Sustainability parliamentary seats (in the top half of countries, Persistent disparities in attainment, especially ranked globally), but only 7 percent of ministerial of upper secondary and tertiary education, posts, placing Cambodia in the bottom 20 percent perpetuate the gender earnings gap in Cambodia. globally (Inter-Parliamentary Union, 2016). The country has achieved significant improvement in education access for the new generation of young Women earn substantially less than men, but females (e.g., ages 25-34) but they still have lower the earnings gap narrows with the attainment chances of completing upper secondary or higher of upper secondary and tertiary education. education than males (12 percent versus 20 percent The gender earnings gap in 2014 was as high in 2014). The gap in secondary school enrolment is as 30 percent among those with low education smaller, at 3 percentage points in 2014, with enrollment and drops to 7 percent among college graduates rising equally for both girls and boys between 2008 (Figure 45). There is no evidence of same-job wage and 2014. Education increases the probability of discrimination, but rather that, within the same female workers having a full-time wage job, thus it is sector, female workers have a higher share in an avenue to attaining better paid jobs. Analysis using lower-paid positions. For example, approximately the CSES 2014 found that upper secondary education 61 percent of microenterprises are female-owned and higher education could increase the probabilities (NIS, 2011), but they are generally smaller, less of females having a full-time wage job by 14 and 48 profitable, and less likely to be registered than percentage points, respectively. The analysis also male-owned businesses (ADB, 2014). Yet, women shows that among household with non-agricultural have an advantage in high skilled occupations businesses, gender gaps in revenues and profits of requiring more education. Analysis of the CSES household businesses decrease when controlling for 2014 data suggests female wage workers gain 4 education. Adding years of education could increase percent more than male for high-skill occupations revenue and profit by about 8 percent for each such as Manager, Professionals, and Technicians additional year, until the gender gaps in revenue and and Associate Professionals, but only 3.4 and 5.4 profits are eliminated. Thus closing the education percent of female and male wage workers are in this achievement gap could eliminate constraints on the occupational category. earnings potential of women. CAMBODIA: Sustaining strong growth for the benefit of all Figure 44. Gender equality in the enterprise 70% 60% 50% 40% 30% 20% 10% 0% Bangladesh Guatemala Cambodia Myanmar Nicaragua Philippines Thailand Vietnam Percent of firms with a female top manager Proportion of permanent full-time production workers that are female (%) Proportion of permanent full-time non-production workers that are female (%) Source: Enterprise Surveys, World Bank Group. Latest available data. 95 Figure 45. Conditional hourly wage and wage gap by education level 1.0 35% Real hourly earning (2005 USD) 30% Male-to-female wage gap 0.8 25% 0.6 20% 0.4 15% 0.2 10% 0.0 5% No education Below primary Primary Lower secondary Upper secondary Bachelor or higher Male Female Wage gap (right axis) Source: Cambodia Socioeconomic Survey 2014, NIS. Other constraints, besides low education, also of workers moved to Phnom Penh for their job (World place women at a disadvantage in the labor Bank, 2015d). While the income generated from market. Women entrepreneurs continue to face this employment provides a vital flow of transfers additional constraints for example. These include to families across the country, it exposes women to limited access to information on business regulations risks to their safety and well-being. Many women opt and training; social norms on how women should to live in poor-quality, inadequate, or unsafe living interact with male employees, business owners, conditions to save money to transfer to their families. and government officials; and greater charges for In addition, forced or excessive overtime places unofficial fees due to their lack of knowledge and/ pressure on workers, and those who are unable or or assertiveness (IFC, 2008; UNDP, 2014; ILO, 2013). unwilling to perform overtime may be subject to Moreover, in spite of women’s greater access to wage reductions or a change from a monthly to a microfinance—representing 81 percent of MFI piece-rate wage (with income dependent on the CHAPTER 5: Is the current Development model sustainable? customers in Cambodia (Mekong Strategic Partners, number of garments produced) (ILO and IFC, 2015). 2015)—women still struggle to access longer-term finance due to limited collateral, low education, The poor health and nutritional status of mothers and the informal nature of their work. Disparities perpetuates inequities, gender gaps and prevents are also evident within the agricultural sector— women’s full participation in economic growth. among households headed by crop growers, the Despite the substantial improvements achieved female-headed households have only 59 percent over the past two decades, Cambodia has one of of the average land size owned by male-headed the highest maternal mortality rates in the region households. In addition, women’s domestic and care at 161 per 100,000 live births in 2015—almost triple responsibilities often reduce the amount of time that of Vietnam (54 per 100,000 live births in 2015). they are available to work on their farm. Consumption of key maternal health services— such as receipt of antenatal care and institutional Rural-urban migration for employment in the deliveries—has rapidly increased in recent years, garment sector, in particular, have increased the driven by improved geographical access to health vulnerability of women to labor exploitation services as well as improved financial access due and poor living conditions. Women dominate to mechanisms such as Health Equity Funds. Today, employment in the garment sector where 97 percent more than 9 in 10 women receive antenatal care from 96 Sustainability a skilled provider, with most (76 percent) attending women to recover economically from disasters— at least four antenatal care visits. However, the as mentioned above, the  majority of women work persistent high rates of maternal mortality indicate in small, informal enterprises and have  little access continued challenges to be tackled with respect to capital and credit.  To begin to address these to the availability and quality of health services, challenges, the Ministry of Women’s Affairs (MoWA) and also broader social determinants of health. has developed a Gender and Climate Change Action According to the CDHS 2014, maternal mortality Plan 2014-2018 which calls for the development and is higher in households that are in the poorest 40 piloting of gender-based climate change projects percent, are headed by an illiterate household head, and initiatives, along with the strengthening of have inadequate access to clean water, and have institutional capacity and knowledge. unhealthy sanitation. Some groups in Cambodia still experience The higher share of vulnerable employment exclusion and discrimination, heightening gives rise to a gender gap in social protection, their vulnerability particularly access to social insurance. More than half of female workers are own-account workers who Although overall crime and violence have receded, are less likely than wage workers to contribute to domestic violence remains a serious threat for pension plans and other social insurance programs, women, children, and LGBTI people.61 Domestic and their workplaces are less likely to be regulated violence, particularly at a young age, is associated by health and safety standards or regulations on with a number of emotional and behavioral problems working conditions. Furthermore, women are more including aggression, delinquency, substance use, financially vulnerable in terms of savings levels and poor academic performance, post-traumatic stress financial security. The Global Findex 2014 shows that disorder, anxiety, depression, and suicidal behavior. women aged 15 or older in Cambodia are less likely Exposure can also have negative consequences to have savings than men, and more than one-fifth for cognitive development, including language of them (23 percent) do not have access to a source deficits and reduced cognitive functioning. After of emergency funds, which can prevent them and some improvement in the rate of spousal abuse of their family from falling into extreme poverty when a women from 2000 (25 percent) to 2005 (22 percent), CAMBODIA: Sustaining strong growth for the benefit of all calamity hits, whether the death of a family member, the rate increased in 2014 (29 percent); similarly, in medical emergency, or natural disaster. 2010, 45.7 percent of women agreed that a husband is justified in hitting or beating his wife for at least Women and men also face differences with one (out of 6) reasons, and this figure climbed up to regard to the impacts of climate change, natural 50.4 percent in 2014 (National Institute of Statistics, disasters, and environmental degradation.  Due 2000, 2005, and 2014). The findings of a 2013 survey to the gender division of labor and decision- revealed that more than half of all Cambodian making in households and communities as well as children experienced some form of physical violence access to and control over resources, women often prior to age 18 by an intimate partner, parent or adult experience a greater burden from the impacts of relative, or community member (UNICEF, 2014). Salas climate change and natural disasters. For instance, when natural disasters strike, women, who are 61  From a high point of 6.76 homicides per 100,000 people typically responsible for procuring food, water, in 1997, the homicide rate has been declining steadily to 1.84 in 2011 (the last year for which data is available) (UN Office on and fuelwood for their families, must travel longer Drugs and Crime’s International Homicide Statistics database). distances to acquire them. Health services, including The Cambodia Socio Economic Survey also found that feelings of safety from crime and violence increased from 61.2 percent those essential for maternal and child health, are also in 2004 to 81 percent in 2014, with similar increases across rural disrupted. Moreover, it is extremely challenging for and urban households. 97 and Srorn (2013) found that 57 percent of gay and LGBTI people continue to face stigmatization by lesbian respondents and 66 percent of transgender their families, communities, and the media, along females reported domestic violence, including by a with discrimination in workplaces and schools. Even range of family members including parents, siblings, though wedding ceremonies are often permitted, aunts, uncles, grandparents, and partners. official certificates of marriage are rarely issued since the Constitution stipulates that marriage is Although a policy framework is in place to between “one husband and one wife.” Furthermore, address violence against women, the roots of traditional family values play a major role in LGBTI violence are deeply embedded in social and discrimination in Cambodia, with frequent reports cultural attitudes that are difficult to change. of families of LGBTI people forcing the separation Traditional social and cultural norms expect women of same-sex partners, attempting to ‘cure’ them, and to be polite and quietly spoken, and to obey and forcing them to marry someone of the opposite sex respect their husband or partner, which in some (UNDP, USAID, 2014). cases is used as justification for violence against women. The 2013 survey found that nearly two in Another highly vulnerable group in Cambodia five females, ages 13-17, and one in three females, is people with disabilities, who comprise a ages 18-24, believed that it is acceptable for a significant portion of the population and husband to hit or beat his wife under one or more suffer from extreme poverty due largely to circumstances. Two in five males ages, 13-17, and discrimination. According to Cambodia’s latest more than one in three males, ages 18-24, also Demographic and Health Survey conducted in endorsed a husband’s use of physical violence. 2014, approximately 10 percent of the population Continuous efforts by government institutions, civil suffers from at least one form of disability (National society organizations, and development partners, Institute of Statistics, 2014).62 Mines (in the past) including implementation of the National Action and traffic accidents (more recently), together with Plan to Prevent Violence Against Women (2014- disease and old age, are the primary reasons for a 2018) and other measures, have had positive person becoming disabled (ILO, 2009). In addition, impacts, and more than 90 percent of adults are studies have found that Cambodians suffer from aware of the Domestic Violence Law. Between 2005 high rates of mental disorders, including about CHAPTER 5: Is the current Development model sustainable? and 2009, fewer respondents to a survey perceived 14-33 percent suffering from post-traumatic stress violent acts to be acceptable, demonstrating an syndrome, compared with the global average of increased awareness of women’s rights (UNDP, 0.4 percent (McLaughlin, 2012). This is probably a 2014c). consequence of the Khmer Rouge era. According to the 2011 Commune Database, 45 percent of While homosexuality is not illegal and Cambodia adults with disabilities do not earn an income has no homophobic religious traditions, (Bailey, 2014), and household wealth for people Cambodia also has no LGBTI anti-discrimination with disabilities was about half that of non-disabled legislation. In addition, several other laws are people (ILO, 2009). Globally, countries lose around largely silent on LGBTI issues, such as those related 1-7 percent of their GDP due to the exclusion of to marriage and related tax, inheritance, hospital persons with disabilities from work and educational visitation, and other family rights issues. Although opportunities (Ibid). visibility of the LGBTI community and activity by CSOs have increased over the last decade— marked by the former King’s 2004 statement in 62  The prevalence of disability increases with age, from 2 percent among children age 5-14, to 13 percent among support of same-sex relations and the first official persons ages 35-59, to 44 percent among those age 60 and registration of an LGBTI organization in 2014— above (National Institute of Statistics, 2014). 98 Sustainability While progress has been made, land a more traditional type of communism under the disputes and displacement remain an issue People’s Republic of Kampuchea. The land was in Cambodia cultivated in solidarity groups, but people slowly started to occupy their “own” parcels. In 1989, the Although poverty incidence among ethnic State of Cambodia’s Constitution was amended to minorities is not significantly higher than among recognize ownership rights for residential land and the ethnic majority as noted earlier, indigenous possession rights for agricultural land. In 1992, the peoples (particularly those in mountainous Land Law introduced a free market economy for land. areas) also face significant poverty risks. Poverty incidence among ethnic minorities is only 2.5 percent Progress with land administration restoration higher than among the ethnic majority, compared to accelerated after the adoption of the new Land 51.6 percent in Vietnam and 23.5 percent in Lao PDR. Law in 2001. By January 2015, 3.8 million land titles Out of an estimated 140,000+ ethnic minorities, more (of the estimated total of 7 million properties) had than half (approximately 80,000) live in the province been registered primarily through a participatory of Ratanakiri and are considered to be indigenous systematic land registration process. The systematic minorities (as distinguished from foreign residents registration process continues today with financing or Chams/Khmer Islam), also known as Highlands retained from the property transaction registration Peoples (IFAD, 2012). Indigenous minorities have fees. Land dispute resolution has been assisted by a strong social, cultural, and economic connection the Cadastral commissions, which were set up to to traditional/communal land and as such are mediate conflicts over unregistered land. The court highly vulnerable to the loss of land from forestry resolves conflicts on registered land, and current development. In 2007, it was estimated that conflicts on registered land are rare. More than one indigenous communities had lost 30 percent of their million hectares of state land have been reclassified traditional land since 1989, which has resulted in to provide for the titles for poor people, including rising poverty (UNDP, 2007). Civil society groups and 360,000 hectares that have been taken back individuals have become confrontational in defense from Economic Land Concessions that had been of indigenous and other land, and this is one of the improperly handed out to agri-business firms. The most contentious—and sometimes violent—issues progress with the 2001 Land Law provision to allow CAMBODIA: Sustaining strong growth for the benefit of all in the country. registration of collective land titles to indigenous communities has been slow, but according to the Cambodia’s civil conflict resulted in displacement ILO, the first 8 indigenous communities received and loss of land records, which is constraining titles as of September 2014. the ability of peasants and communities to invest in, lend, or protect these assets. Following French Despite the remarkable progress in land rule, the land administration system in the 1960s administration, substantial challenges remain. included land records and cadastral maps, but the Legal registration of land rights still does not system started deteriorating during the war in 1970- cover all areas, leaving many poor without secure 1975. In the mid-seventies, with the Khmer Rouge tradeable land rights, and the majority of indigenous taking power, individual ownership of land was peoples’ communities have not received titles. banned, cities emptied, and people were forced to Sustainability is also a concern, as informal land live in communes to work on massive agriculture and transactions remain common both for registered irrigation projects. The infrastructure was destroyed, and non-registered land and property rights. The and land registration records were all lost. In 1979, property valuation and property taxation system Vietnamese forces helped overthrow the Khmer is inefficient and lacks transparency, and avoiding Rouge from the main parts of Cambodia, introducing property transfer taxes is a common incentive for not 99 registering land and property transactions. Taxation livelihoods of the poor through both products valuation inaccuracies and lack of transparency and ecosystem services that sustain other lead to taxation inefficiencies that constrain local economic activities. Cambodia is endowed with revenues. Implementation of the 2014 National extensive forests accounting for about half of its Policy for Land Valuation (NPLV), which sets a base land area; significant water resources flowing from for valuation infrastructure (profession, institutions, the Mekong and Cardamom Mountains with highly standards), valuation services, data management productive fisheries; pristine mangroves and coral and capacity building requirements, has not started. reefs found along its 440-kilometer coast supporting a fast growing resource-based tourism industry; and A related area of concern is the lack of large areas of fertile land suitable for agriculture.63 comprehensive State Land Designation and Overall, around 80 percent of the rural poor depend Registration, which allows inefficient and non- on forests and agriculture for their livelihoods (CIFOR, transparent decisions on state assets use. The core 2014), and the share of agriculture in total GDP (30 symptom of this problem is that land and mineral percent in 2015) is significantly higher than the concessions have been made without proper location average for lower middle-income countries. Forests, or size information and with inadequate consideration which provide timber and fuelwood, also serve as of the actual land use on the ground. This has led to carbon sinks, protect watersheds, reduce soil erosion numerous conflicts between the companies receiving and loss of soil fertility, and prevent flooding, thereby concession rights and local people, which the RGC has slowing the sedimentation of reservoirs and helping had to address. The lack of a complete and consistent to shield croplands in lower areas. Meanwhile, National Spatial Data Infrastructure (NSDI) or One fisheries provide primary employment for more than Map type of geospatial tool in Cambodia contributes 0.3 million Cambodians and also provide important to the location and size problems with concessions. sources of protein and vital micronutrients that are This negatively affects infrastructure investments in of particular importance for poor, malnourished roads and transport, logistic performance, and the populations (IFReDI, 2013). In particular, the Tonle Sap cost of energy, contributing to constraints on growth Lake, with its fluctuation in size driven by seasonal and also affecting the environment, as discussed in flooding from the Mekong, plays a very important the next section. Success with land records could role in the productivity of Cambodia’s agriculture and CHAPTER 5: Is the current Development model sustainable? be accompanied with corresponding geospatial fisheries sectors, including its freshwater mangroves infrastructure, and these together can become the and flooded forests that serve as breeding grounds basis of the future electronic governance system in for more than 300 species of fish and crustaceans. Cambodia. However, in pursuit of growth, Cambodia’s 5.3 Risks and opportunities for ecosystems and natural capital have been degraded significantly due to poor practices, environmentally sustainable and uninformed decision-making, and limited resilient development investments in the sustainable management of Unsustainable economic activities are asso- 63  Altogether, Cambodia’s forests, riverine, and coastal ciated with a degradation of natural capital, ecosystems provide habitats for diverse plant and wildlife increasingly endangering their contribution species—around 2,550 native species of flora and fauna, including endangered species such as the Asian elephant, to the economy and poverty reduction tiger, Irrawaddy dolphin, giant catfish, and numerous large water birds (IUCN, 2016). These diverse ecosystems are part Cambodia has rich and diverse natural capital, of the larger Mekong River Basin, a landscape that supports development opportunities for the six countries through which contributes significantly to the GDP and which the river flows. 100 Sustainability these productive assets. Land expansion has been Figure 46. Cambodia’s forest cover decreased a major factor in agricultural growth, with cultivated by 21 percent between 2006 and 2014 land for crops increasing by 50 percent between 2002 and 2012, but it has partly come at the expense Forest cover, % of total country area of forests and wetlands (World Bank, 2015). Official 65% estimates indicate that forest cover declined from 59.6% nearly 60 percent in 2006 to less than 47 percent 60% 57.6% in 2014 (Figure 46) (MoE, 2016). This is mainly due to the conversion of forest areas within economic 55% land concessions (ELCs) into large agriculture and 50% 46.9% rubber plantations, with the loss of forest lands in protected areas due to land concessions estimated 45% at 14 percent (Forest Trends, 2015). Similar factors have led to loss of wetlands, which had already 40% 2005/2006 2010 2014 reached 45 percent by 2003 (MRC, 2016). Of the Sources: Ministry of Environment (MoE), 2016. remaining 9 million hectares of forest cover, much has been degraded due to selective logging and unsustainable fuelwood extraction. In addition, Degradation has been especially high in the upland approximately 5.5 million tons of fuelwood are used areas used for cassava production (World Bank, each year by households and SMEs (GERES, 2015), 2015). Whereas forests could serve as ecological with 88 percent of the population still  relying on buffers to natural disasters, their destruction results traditional biomass for cooking—far higher than the in increased soil erosion, deteriorating water quality, regional country average of 58 percent.64 Wood fuel and extreme flooding. is also used extensively in the industrial sector—71 percent of factories use woodfuels, amounting to Fisheries are essential from a food security 43 percent of total energy used by factories (Better perspective, and overfishing represents a further Work, 2009). threat to rural communities, particularly those around the Tonle Sap. Cambodians are the world’s CAMBODIA: Sustaining strong growth for the benefit of all Deforestation and agricultural expansion are largest consumers of freshwater fish per capita, also increasing land degradation and erosion, relying mainly on fish and rice for their daily dietary resulting in lower agricultural and fisheries energy sources. As noted above, fisheries are also productivity, as well as reduced resilience to critical for the direct income they provide to 0.3 million floods. Cambodia is among the countries with the people. Aquaculture, which accounted for around 16 largest share of land degradation hotspots,65 with percent of total fisheries production in 2014, also about 60 percent of its population residing in such generates employment in related businesses such areas (World Bank, 2015). Cambodia’s already low soil as feed production (FAO, 2014). In 2012, fisheries fertility has been further degraded in recent years reforms ended the leasing of large “fishing lots” in the due to a combination of human-induced and natural Tonle Sap to a small number of commercial fishing factors, including slash-and-burn land clearance, operations and instead gave rural communities open unsustainable agricultural practices that mine access.  While this likely generated nutritional and instead of replenish soil nutrients, and heavy rainfall. income benefits for the rural poor in the short run, it has also made fisheries management much more 64  IEA, World Energy Outlook 2016. challenging and diminished the long-term social 65  Using global information on the changes in the normalized and economic benefits of the resource. Recognizing difference vegetation index between 1982 and 2006, which serves as a proxy for land degradation (World Bank, 2015). this, authorities have recently divided the lake into 101 hundreds of community co-managed fisheries, vulnerability to adapting to a changing climate, mixed with newly designated conservation areas. The and to preventing and responding to natural success of this approach in replenishing fish stocks disasters. Although the country is regularly in the Tonle Sap to sustainable levels will require exposed to floods and droughts as part of its effective implementation and enforcement over time. natural hydrological cycles and typhoons are a regular occurrence in the region, its mangroves Cambodia also faces challenges with both water and forestlands have traditionally served as both quantity and quality. In 2016, the Mekong river ecological buffers and social resiliency—helping exhibited highly variable flows, and in some areas to prevent soil erosion, reduce extreme flooding the water level at the end of the dry season reached and protect fisheries. In recent years, however, record lows (IRIN, 2016), with households across the human-induced natural resource degradation and country reporting drought-related water shortages poorly planned development in low-lying areas has and crop losses (UNICEF, FAO, and WFP, 2016.). This occurred in concert with increased incidence and lack of predictability in water availability is having intensity of natural disasters and a changing climate, a detrimental effect on small farmers throughout contributing to further degradation. As a result, the country, especially given that 86 percent of rice Cambodia has witnessed significant deterioration cultivation relies mainly on rain and surface-runoff of livelihoods and destruction of infrastructure, with for water (FAO 2011). Water quality is also a growing average damages from disasters estimated at USD problem, with declining quality due to upstream 235 million per year (Germanwatch, 2016). This has deforestation and erosion that increase turbidity a major impact on the national budget, which is and modify run-off flows, as well as to pollution from regularly diverted away from development activities poor pollution control or treatment practices, runoff toward emergency response and reconstruction of agricultural pesticides and fertilizers, and domestic of infrastructure in the face of increasing climate and industrial wastes (Chea et al., 2016). Both water risks. Overall, Cambodia was ranked as the 8th most levels and water quality are expected to be further disaster-prone country in the world by the UN’s affected by the construction of planned dams along World Risk Index66 and 146th out of 180 countries on the Mekong, and large hydropower development the 2016 Environmental Performance Index, due to is also anticipated to trap around 50 percent of its low levels of environmental health and vitality67 CHAPTER 5: Is the current Development model sustainable? agricultural sediment and nutrient flows needed to (Figure 47). nourish the Tonle Sap and replenish the delta (IUCN, 2014) as well as reduce the availability of inland fish In the future, climate change is expected to by 6 to 34 percent (Inland Fisheries Research and further exacerbate the vulnerability to and Development Institute, 2013). Overall, sustainably damage from natural disasters associated with managing Cambodia’s water and associated extreme weather events as well as to the fast natural resources as well as further developing growing impacts of slow onset events, likely their potential is becoming an increasingly difficult leading to a slowdown in economic growth. The challenge, which is exacerbated by the country’s mean annual temperature across Cambodia has lack of monitoring systems and infrastructure for integrated water resources management (IWRM). 66  Exposure considers the number of people exposed to earthquakes, cyclones and/or flooding, number of people Climate and disaster risks compound threatened by drought and/or sea level rise, and the country’s total population. Vulnerability is based on a country’s environmental sustainability challenges susceptibility, coping capacity, and adaptive capacity. 67  Ecosystem vitality considers indicators on water resources, agriculture, forests, fisheries, biodiversity and habitats, and The degradation of Cambodia’s natural capital climate and energy. Environmental health considers indicators also increases its weaknesses, exposure and on health impacts, air quality, and water and sanitation. 102 Sustainability Figure 47. Cambodia’s environmental health and 0.56m by 2100, leaving 435 kilometers of the and vitality are low, and its exposure and coastline vulnerable and permanently inundating vulnerability to climate risks are high up to 25,000 hectares of coastal area (IFAD, 2010). Collectively, these impacts will result in increased Comparison, Environmental Performance Index & World Risk Index uncertainty in the availability of water for domestic and productive purposes as well as a significant 80 slowdown in economic growth. Based on the 70 scenario of a 2°C temperature rise by 2050, initial 60 estimates suggest that climate change will reduce 50 Cambodia’s total GDP by at least 1.5 percent in 2030 40 and 3.5 percent in 2050 (RGC, 2015a).71 30 20 In particular, climate change impacts will be felt severely across Cambodia’s agriculture and 10 fisheries sectors, threatening rural livelihoods 0 Environmental Ecosystem Exposure Vulnerability and incomes, especially in the Mekong Delta Health Vitality region. Several studies have shown that rising Cambodia Lower-MICs World temperatures have negative effects on crop cycles, Sources: World Risk Index (2015). United Nations University, Institute reducing yields by about 10 percent for every for Environment and Human Security. Environmental Performance Index (2016). Yale Center for Environmental Law and Policy. 1°C increase in minimum temperature during the growing season (IFAD, 2010). Changes in rainfall patterns and variability are of particular concern already increased by approximately 1.2 degrees for rice production in Cambodia, given that it is 83 Celsius since 1960 (from 26.8 to 28.0°C),68 and it is percent rain-fed and makes up 70 percent of the total projected to rise by another 0.7-2.7°C by the 2060s wet season crop area (World Bank, 2015). The Mekong and 1.4-4.3°C by the 2090s (IFAD, 2010). Likewise, Delta is among the most vulnerable regions to these heat stress days69 per year are forecasted to increase climate impacts, with changes in freshwater supply from 273 in 2015 to 323 in 2045 (Maplecroft Verisk, caused by salinity intrusion and flooding, which are CAMBODIA: Sustaining strong growth for the benefit of all 2015), resulting in a 16-percent reduction in labor expected to lead to a decline in rice yields by 6 to capacity. Estimates also suggest that Cambodia’s 12 percent by 2050 (World Bank, 2010). Meanwhile, rainfall will become more variable, with a projected Cambodia’s fisheries and aquatic resources, which increase in rainfall of up to 40 percent during the are closely tied to the natural dynamics of the rainy season and a decrease of up to 58 percent Mekong and Tonle Sap lake and floodplain, are also during the dry season in 2060-2080, but with a wide at risk, and Cambodia’s fishers are classified as highly range of predictions from various climate models.70 vulnerable to the effects of climate change (Allison et Cambodia’s coastal communities will also be affected al., 2009). In addition, salinity intrusion and flooding by the projected rise in sea level of between 0.18m are increasingly affecting domestic freshwater supply, particularly in the Mekong Delta. 68  World Bank Climate Portal: The dataset is produced by the Climatic Research Unit (CRU) of University of East Anglia (UEA). 69  Heat Stress Days are defined as the number of days per 71  The main sources of this damage are from drought and year on average on which the wet bulb globe temperature floods in agriculture (1.4 percent of GDP); increased burden (which is primarily dependent on humidity and temperature) of diarrhea and other climate-sensitive diseases (0.9 percent exceeds 25 degrees Celsius, signifying unsafe levels of heat of GDP); more rapid degradation of infrastructure, including stress. Beyond this level heat stress can cause dizziness, fatigue roads, irrigation, and rural water supply (0.7 percent of GDP); and nausea and even death in extreme cases. and flood damage to urban infrastructure (0.3% of GDP) (RGC, 70  World Bank Climate Portal. 2015a). 103 Figure 48. Cambodia’s emissions per capita, including LUCF, are slightly higher than the average for Lower-MICs Emissions Per Capita (tCO2e) Emissions Sources (MtCO2e) 8 7 Electricity, 1.7% Emissions Per Capita (tCO2e) 6 Industrial,1.0 % Manufacturing 5 Agriculture, Construction, 1.2% 39.5% Transport, 4.0% 4 Waste, 0.7% 3 Other, 5.4% 2 1 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Cambodia, including LUCF Cambodia, excluding LUCF LUCF, 46.6% Lower-Mics, including LUCF Lower-Mics, excluding LUCF World, including LUCF World, excluding LUCF Sources: CAIT Climate Data Explorer. World Resources Institute (2012). Meanwhile, Cambodia’s contribution to climate the country’s total emissions above the average change, although relatively low globally, is for lower middle-income countries. Recently, increasing, with its largest share of emissions carbon emissions from the forest sector have come coming from agriculture and land use change and mainly from land clearance associated with land forestry (LUCF) (Figure 48). Although Cambodia’s concessions, thereby releasing carbon stored in per capita emissions have declined by 30 percent biomass and soils (Forest Trends, 2015). In addition to since 1990, its total emissions have increased by 16 contributing to climate change, these emissions are percent, owing largely to a 46 percent increase in affecting Cambodia’s indoor and outdoor air quality CHAPTER 5: Is the current Development model sustainable? emissions from the agriculture sector72 and more and thereby human health, as well as putting strong than doubling of energy emissions (WRI-CAIT, 2012). pressure on natural forests.74 In addition, 47 percent of Cambodia’s total emissions still come from LUCF (Forest Trends, 2015),73 pushing Poorly planned urban development heightens risks and may constrain growth 72  In the agricultural sector, rice cultivation and livestock represent the largest contributions to emissions, followed Cambodia is in the early stages of its urbanization by soils and manure management (GSSD, 2015). Carbon emissions from the forest sector have come mainly from land process but already has a relatively high urban clearance associated with land concessions, thereby releasing population density. The urban population in 2014 carbon stored in biomass and soils (Forest Trends, 2015). 73  This is even despite a sharp 26-percent decrease between 2005 and 2006 which roughly corresponded with the end of the timber concession system around 2004, an integral part scale timber harvesting came to a halt with a logging and log of the forestry reform process initiated by the RGC and its transportation moratorium due to the absence of acceptable international development partners in 1999. A new Forestry management plans and continued illegal logging. Law was passed in 2002, and by 2003, many concessions 74  Approximately 22 percent of wood-fuels consumed had been cancelled for a variety of reasons, and additional annually in Cambodia are not sustainable, as they come from protection forests were designated by 2004. Even so, some forest-to-agriculture land conversion (GERES, 2015). Once Cambodian subcontractors linked to security forces and this ends, the risk is that future wood-fuels will come from high-level government continued to log. Nevertheless, large- protected areas. 104 Sustainability was 21 percent (UN, 2015).75 This is considerably identified as areas where service provision is limited, lower than other countries in the region, in part due particularly in low-income urban areas (ADB, 2012; to the massive reallocation of people from urban Sahmakum Teang Tnaut, 2014). Good progress has to rural areas under the Khmer Rouge regime. The been made through the efforts of local authorities constant annual urbanization growth rate, at around and international donors in both urban water supply 2.2 percent over 2004-14, has also been lower than and sanitation, with access in urban areas at 100 in most countries at a similar stage of urbanization. percent for improved water and over 80 percent for Meanwhile, the average population density in improved sanitation. However, urban sewerage and urban areas in Cambodia is among the highest in wastewater treatment in Cambodia are minimal, with the region (Figure 49, left panel), and Cambodia’s drainage systems that frequently overflow and only urban population is forecasted to increase by 2.3 to 13 percent of the urban population with sewerage. 2.8 percent per year over the next 35 years, resulting In addition, Phnom Penh still does not have a in 36 percent of the population living in urban areas wastewater treatment facility and is discharging by 2050. Urban growth will remain concentrated in its wastewater into lagoons, which affects rivers Phnom Penh and its immediate vicinity, with the (WaterAid, 2015). Moreover, insufficient solid waste population in Phnom Penh expected to increase management has become a major cause of urban from 1.7 million in 2015 to nearly 2.6 million in 2030 drain blockages, increasing the risk and severity of (UN, 2015; World Bank, 2015c). floods and contributing to poor hygiene conditions. However, the provision of infrastructure and Likewise, the development of transportation public services has not kept pace with urban networks has not kept pace with economic growth growth, resulting in greater environmental in spite of significant donor assistance. Increased degradation. Roads, drainage, sewage, wastewater motor traffic has put pressure on existing urban road treatment, and solid waste collection have been systems and resulted in more traffic congestion and air pollution. The number of registered vehicles in Phnom Penh increased 3.2 times just between 2001 Figure 49. Cambodia has a high urban and 2012 (JICA, 2014), compared to a population population density increase of around 1.3 times. The travel speed in CAMBODIA: Sustaining strong growth for the benefit of all Average Urban Population Density, Phnom Phen city center decreased from 22.9 km/ 2010 (persons/sq. km) hour (2001) to 14.6 km/hour (2012) due to vehicle increase and limited road development. Meanwhile, Thailand the development of formal public transport systems China is limited, resulting in a lack of options for commuters. Overall, the annual damage from particulate matter Myanmar pollution in Cambodia is estimated as equivalent to Vietnam 0.8 percent of GDP.76 Cambodia Cambodians living in urban poor settlements Indonesia are disproportionately affected, given their low Philippines access to services and high flood risk. With a 0 2000 4000 6000 8000 10000 12000 shortage of affordable housing options available, Source: World Development Indicators. informal housing is often the only solution to meet the needs of the growing urban population. In 75  Urbanization rates in neighboring countries are 53 percent in Indonesia, 49 percent in Thailand, and 33 percent in Vietnam. 76  World Development Indicators. 105 Cambodia more than half of the population in urban infrastructure linkages with surrounding areas. areas is living in urban poor settlements.77 Common This makes cities less efficient, widens spatial and settlement sites are along major infrastructure economic disparities, and increases congestion and and transportation lines in and out of the city. pollution. Households in informal settlements typically have low access to reliable basic services, particularly Sustainable growth is faced with tradeoffs sewage, garbage collection, and social services. for competing demands on natural capital In some neighborhoods, residents are exposed to health risks through contaminated water supply and As Cambodia continues to grow, its already hazardous waste, and the informal settlements are stressed environment and natural resources will also often located in flood-prone areas. be further strained due to greater demand for natural capital, including food, water, and energy. Cambodia’s poorly planned and managed urban Demand for electricity is projected to grow by 12 development also heightens its vulnerability percent per year through 2030 (World Wildlife Fund, to the impacts of natural disasters and climate 2016), with Cambodia’s Power Sector Development change, which may pose a constraint to economic Plan 2016-2030 projecting a quadrupling of installed growth. In addition to cities’ vulnerability due to capacity by 2030. Indigenous coal-fired and hydro their location in flood-prone areas along the Mekong generation are projected to dominate the generation and its tributaries, urbanization and industrialization matrix, representing 50 percent and 40 percent, is also contributing to the destruction of Cambodia’s respectively,79 but inadequate assessment of natural habitats that provide food resources, potential environmental and social impacts of hydro tourism and coastal protection. For instance, the and coal projects raise the question of sustainability country’s remaining 78,000 hectares of mangroves, (World Bank, 2013b). Coal-fired power generation which are vital for preventing coastal erosion and increases GHG emissions and PM2.5 levels, which minimizing the impacts of natural disasters, have have negative impacts for the environment and come under threat from coastal development as human health.80 Although hydropower is a relatively well as unsustainable activities such as sand mining, low-emission energy alternative, it has significant salt pan production, and coastal aquaculture. CHAPTER 5: Is the current Development model sustainable? impacts on the livelihoods and food security of This is at least partly attributable to weaknesses millions of Cambodians. In addition to displacing tens in the environmental management capacity for of thousands of people, dams restrict the deposit of investment projects, which often proceed before nutrients for agriculture, obstruct migratory fish EIAs and environmental management plans (EMPs) breeding, fuel additional deforestation, and reduce are completed.78 Overall, Cambodia’s weak urban sediment flow to the delta, thereby increasing planning and management capacity has resulted coastal erosion and the risk of saltwater intrusion.81 in fragmented urban expansion. Peri-urban areas around Phnom Penh have seen the growth of 79  Although the current power sector development plan “satellite cities” that provide luxury accommodation does not foresee any share of sustainable energy, the first solar to a small segment of the population and have no PV-based generation pilot project of 10 MW was tendered in October 2016. 80  In the United States, the external costs of coal-fired power 77  UN Habitat. (namely, its health impacts) have been estimated as being 78  The overall effectiveness of EIA implementation equivalent to an additional USD 0.18 / kWh. in  Cambodia is considered to be low.  Only a small number 81  Of the 85 percent of fish production comes from capture of projects complete the EIA process under the existing Sub- fisheries in Cambodia, compared with just 15 percent from Decree. Provincial departments of environment do not have aquaculture (Baran and Gallego, 2015), approximately 30 adequate capacity for effective EIA implementation. Also, due to 40 percent of total catch, by weight, are highly migratory to weaknesses in legislation, it is difficult to enforce. (Baird and and therefore at risk from hydropower development (Halls & Frankel, 2015). Kshatriya, 2009). 106 Sustainability Meanwhile, meeting Cambodia’s growing demand among a broad range of stakeholders, including for food—estimated to increase by 12 percent the government, private sector, civil society between 2009 and 2030 (World Bank, 2015)—will organizations, and Cambodian citizens. Ultimately, require the sustainable management of Cambodia’s by investing in the sustainable management of forests, watersheds, and other natural ecosystems, its natural capital, Cambodia can increase socio- along with improvements in agricultural economic benefits, while reducing the level of productivity. investment required for cleanup and rehabilitation as well as the amount of pressure placed on competing Looking forward, Cambodia faces several critical demands for resources. This will also substantially decisions on how to balance its immediate strengthen Cambodia’s ability to achieve its growth development needs with its long-term economic and poverty reduction objectives in the Rectangular and environmental sustainability goals. This Strategy along with its climate adaptation will require improved short- to longer-term and mitigation commitments in its Nationally planning across sectors, better informed decision- Determined Contribution (NDC), which identifies making processes, greater public sector capacity, Cambodia’s post-2020 national climate priorities and significantly increased investments in natural capital became binding when Cambodia ratified the Paris and environmental services, and coordination Agreement.82 CAMBODIA: Sustaining strong growth for the benefit of all 82  The Paris Agreement entered into force on November 4, 2016 and, as of February 24, 2017, 132 countries have ratified the agreement which aims to strengthen the global response to climate change by holding the increase in global average temperature this century to below 2°C above pre-industrial levels, and to pursue efforts to limit this increase even further to 1.5°. The Agreement also aims to strengthen countries’ abilities to cope and adapt to the impacts of climate change. 107 Chapter 6 Priority interventions to encourage strong, inclusive, and sustainable development in Cambodia 6.1 Determining areas for development identifying the areas for development. In and priority interventions addition to drawing from comprehensive analysis and literature review, the identification of areas CHAPTER 6: Priority interventions to encourage sustainable development for development has been heavily informed by In-depth World Bank analysis and consultation these consultations, which gave key stakeholders with stakeholders were conducted to help opportunities to directly influence the SCD. Nine pinpoint a few critical areas for ensuring meetings were held in four different regions of strong, inclusive, and sustainable growth and the country,83 with 375 participants providing shared prosperity in Cambodia going forward. feedback on the key development opportunities for While arguments can be made for a wide range of achieving poverty reduction and inclusive growth in interventions across various sectors, not all measures a sustainable manner in Cambodia. Different tools would have the same impact on economic growth, were used during these consultation meetings to poverty reduction and shared prosperity. To identify enlist local experts in helping to identify priorities areas for development and priority interventions, for the country’s development.84 Agriculture this SCD utilized a two-step process: first, the analysis and literature review, together with the consultation 83  In particular, between November 23 and December 14, process, informed the selection of the ten areas for 2016, six meetings were held in Phnom Penh, one was held in development; second, a two-tier methodology was Sihanoukville, one in Siem Reap, and one in Kratie. In addition to plenary stakeholder consultations, three meetings with a applied to assess the constraints to growth and asset technical working group led by the Ministry of Economy and accumulation and to identify priorities within those Finance were held at different stages of the preparation of this ten development areas. SCD to discuss and validate the main storyline, findings, and proposed development areas and policies. 84  First, all participants were given a questionnaire (in English The extensive stakeholder consultations with and Khmer) which asked them to identify the top three crucial government, private sector, development development areas for Cambodia to end poverty and share prosperity more widely. The questionnaire was completed by partners, and civil society were critical in 322 participants. Second, participants were asked to provide 110 Policy Priorities Table 8. Top areas for development from individual questionnaires and meeting discussions Meeting Individual Priority listed as top 3 in… discussions Questionnaires Agriculture modernization 67% 41% Education and skills 56% 36% Institutions, governance, and public service delivery 33% 23% Cost of doing business and trade facilitation 33% 28% Resilient infrastructure and improved connectivity 28% 33% Health care 22% 41% Financial sector & access to finance 22% 28% Natural resource management & disaster risk management 17% 26% Source: Results obtained from consultation meetings. modernization, education and skills, governance In addition to those areas identified during the and public service delivery, and the cost of doing consultations, the analysis, as well as recent business and trading emerged as part of the top research, points to other areas for development three areas for development in at least three of deemed important in Cambodia. As discussed the meetings with stakeholders, including group earlier, there is an important need to shield discussions (Table 8). Results from 322 individual households from shocks, as Cambodia has one of questionnaires also point to a similar set of areas as the highest shares of out-of-pocket health care being most relevant. expenditures in the world and is especially exposed to natural disasters and climate change—these CAMBODIA: Sustaining strong growth for the benefit of all More than 1,000 postcards collected from citizen shocks particularly affect the vulnerable. Also, outreach interventions signaled similar areas stunting affects 32 percent of the children under for development. During the SCD consultation age 5 in Cambodia, which is likely to hamper their period, the World Bank team reached out to people cognitive development and, ultimately, much- in universities and other public spaces around needed human capital formation. Tackling this issue the country and invited them to fill in postcards would require cross-sectoral efforts and targeted with their dream for Cambodia in the next ten years. interventions. Urbanization emerged as another area Postcards were filled out by around 1,100 individuals for development during one of the three additional and have been analyzed and summarized in Figure consultation meetings with the designated technical 50. Overall, the results from the postcards collected working group for this SCD, led by the Ministry of point to some of the same top priorities that emerged Economy and Finance; these additional meetings from the meeting discussions, namely education, were aimed at validating the storyline, findings, and agriculture, healthcare and roads. proposed policy options. feedback during the meetings themselves. In four of the nine The priority areas identified mutually reinforce meetings, groups of 8-10 participants were asked, as a group, to each other as part of three pathways aimed at identify their top three areas for development—approximately 190 people in 21 groups participated in this exercise. maintaining strong and sustainable economic 111 Figure 50. Top areas for development in collected postcards Top themes, by percentage of total collected postcards 20% 18.7% 15% 10% 8.6% 7.6% 7.3% 7.2% 6.8% 5% 0% n th e s lth n ad ur io tio w ea at Ro ult ro up H uc ric G rr Ed Ag co o N Source: Results obtained from postcard collection. growth and boosting shared prosperity: The relevance of the selected areas for action (i) increasing economic competitiveness and and proposed pathways has been endorsed diversification to sustain strong growth and create during an additional round of consultations jobs by reducing the costs to firm establishment and with government counterparts and donors. On operation, boosting public and private investment February 21, 2017, the pathways, priority areas for in infrastructure and machinery, strengthening development, and concrete policy options in this CHAPTER 6: Priority interventions to encourage sustainable development regulation and supervision of the financial sector to SCD were presented in a final plenary consultation ensure its efficiency and resilience, and facilitating meeting at the Ministry of Economy and Finance, and modernization of the agriculture sector; (ii) convening representatives from all the line ministries building the assets of the poor and the bottom 40 and key development partners. There was agreement to facilitate economic mobility by investing in the on the relevance of the ten proposed areas for action, early years to ensure adequate nutrition and brain and feedback received during the meeting on some development, boosting attainment and learning of the proposed policy options has been incorporated outcomes in secondary and higher education, to further tailor them to the needs of Cambodia. protecting them from shocks; and (iii) investing in the maintenance and development of natural capital These pathways are also consistent with the by adopting an spatially integrated approach and strategic areas identified in the authorities’ strengthening climate resilience, as well as ensuring ambitious and wide-ranging Rectangular the development of competitive, sustainable, and Strategy Phase III but represent a more focused inclusive cities by implementing an integrated urban view of the areas that require greater policy planning agenda. In addition, a cross-cutting area attention. The RGC’s Rectangular Strategy lays out for development would focus on public financial a broad development agenda, with a framework management and public administration reform to that includes overarching support for good improving quality service delivery and enhancing governance and an enabling environment, along public sector capacity to implement other proposed with four “strategic rectangles”—(i) promotion of reforms (see Table 9). the agricultural sector, (ii) development of physical infrastructure, (iii) private sector development 112 Policy Priorities Table 9. Cambodia SCD pathways and identified priority areas for development Areas for development Key constraint to growth & twin goals i. Increasing 1. Reducing the costs of firm establishment and operation Highest economic (including business environment, informal fees, trade competitiveness facilitation, electricity costs) and diversification to sustain strong 2. Boosting public and private investment in infrastructure High growth and create and machinery acquisition while developing capital markets jobs 3. Strengthening regulation and supervision of the financial Moderate sector to mitigate risks from strong credit growth, while building further financial inclusion 4. Fostering agricultural modernization in the aftermath of High the commodity price boom ii. Building human 5. Endowing people with skills by boosting attainment and Highest assets to facilitate learning outcomes of secondary and higher education economic mobility and shared 6. Investing in the early years (nutrition, pre-primary High prosperity education) 7. Protecting households from shocks (OOP in health, DRM, Moderate social protection) iii. Ensuring a 8. Maintaining and developing natural capital, while High sustainable growth strengthening climate resilience pattern by investing in natural capital, 9. Promoting competitive, sustainable, and inclusive cities Moderate climate resilience, through integrated urban planning and sustainable CAMBODIA: Sustaining strong growth for the benefit of all urban development iv. Cross-cutting 10. Public administration and public financial management High reform for improved service delivery Source: World Bank staff analysis in consultation with stakeholders. and employment, and (iv) capacity building and areas where more attention is needed to address human resources development. The RGC’s National the most critical challenges to maintaining strong Strategic Development Plan (NSDP), 2014-2018, and sustainable growth with poverty reduction and serves as a roadmap for the implementation of the shared prosperity. Rectangular Strategy, and ensures that the programs and projects of all ministries, agencies and sub- To prioritize interventions among the ten identified national authorities are aligned in support of its areas for development, this SCD combines a implementation. Rather than covering all of these growth diagnostics framework and an asset-based areas, the pathways proposed here focus on the key approach. The framework outlined in Bussolo and 113 Lopez Calva (2014) suggests that identifying critical critical for both creating better jobs and increasing challenges and priorities for achievement of the twin household incomes. These are prerequisites for goals (poverty reduction and shared prosperity) Cambodia’s next phase of growth (by maintaining requires identifying constraints to sustained competitiveness and moving to the next phase of economic growth, accumulation of household economic transformation in production and labor assets, and resilience of households (see Box 3). This outcomes), yet Cambodia performs poorly relative section of the SCD summarizes these constraints to to its peers in these dimensions. Addressing these identify priorities for reducing poverty and boosting challenges have economy-wide effects that amplify shared prosperity. It starts with the identification of their impact on the achievement of the twin goals. constraints to growth using the growth diagnostics framework proposed by Hausmann, Rodrik, and The areas for development identified as “high Velasco (2005), followed by a summary of constraints priority” have a moderate immediate direct to household assets accumulation and a discussion impact on the twin goals but form the building of constraints to sustainability and resilience to blocks for sustained growth and increasing the shocks. This subsection filters challenges and risks income-generating capacity of households. already identified in sections 4 and 5 through the Maintaining and building natural resource capital lenses of these two frameworks for prioritization while strengthening capital resilience, investing in purposes. The results from the prioritization exercise early years, and bosting public and private sector are presented in Table 9 (see above). The following investments in infrastructure are in this category. subsections go in depth through the prioritization of These factors have high complementarities. areas for development resulting from the application Boosting public and private sector investments in of the two frameworks. Concrete policy interventions infrastructure is complementary to both reducing in each of the three pathways are presented in the costs of operations for firms and modernizing sections 6.2, 6.3, and 6.4, respectively. The areas for agriculture, for which building natural resource CHAPTER 6: Priority interventions to encourage sustainable development development have been ranked based on the impact capital while strengthening capital resilience is interventions would have on maintaining strong and also critical. Investing in early years is critical for sustainable growth and achieving the twin goals, improving attainment and quality of secondary and in terms of creating and enhancing households’ higher education to build a productive workforce, participation in better economic opportunities, the which is needed both for creating and enhancing share of population affected, and complementarity household participation in better jobs. Modernizing with other interventions. The analysis also considered agriculture has high potential for boosting incomes whether the identified challenges pose an immediate for the poor and will serve as a foundation for linking constraint to growth and household economic the farm sector to non-farm sector. Finally, improving mobility or are likely to become a constraint in the the quality of public service delivery through public future. administration and public financial management reforms is a key enabler for successful policy The areas for development identified as “highest interventions in other areas for development. priority” have the largest impact on the twin goals, based on their impact on firms’ ability to create The areas for development identified as more productive jobs, on sustaining growth, “moderate priority” comprise reforms that may and on raising household income. The analysis of not yet address the most significant constraints constraints to growth and accumulation of household but have consequential implications in the assets shows that raising educational attainment, long-term, or those that have high but localized learning outcomes, and skills and reducing costs for impacts, focusing on smaller sub-segments of the firms in Cambodia are complementary and the most population or whose goals can be achieved by 114 Policy Priorities addressing other constraints. Shielding households to identify key constraints to entrepreneurship and from shocks falls into this category. Increasing capital accumulation. According to this framework, climate resilience, for example, would reduce the economic growth depends on the returns to impact of disasters on household income, while investment, the “appropriability” of such returns (the protecting households from income shocks could ability of private actors to actually reap the returns also be achieved by leveraging social protection from their investment), and the cost of financing instruments like CCTs to address demand-side capital accumulation. challenges when investing in early years or boosting secondary education attainment. At the same time, Returns to capital in Cambodia are higher than Cambodia’s current demographic profile makes in other countries, but they have been on the pension reform a moderate priority in the short term. decline. Geography seems to have been positively Similarly, urbanization is still incipient in Cambodia contributing to growth, since Cambodia is located and affects a relatively limited proportion of the in the fastest-growing sub-region in the world population, but the building negative externalities and has been benefiting from the relocation of (congestion, pollution) pose a significant risk to garment suppliers from China. The focus on low- strong, sustainable, and inclusive growth in the cost manufacturing has worked relatively well long run. so far with a young and relatively unskilled labor force, but the low levels of secondary and higher More detail on the application of the two education attainment are likely to become a more prioritization frameworks leading to this severe constraint to growth going forward as the categorization of priorities, including on the economy tries to diversify its export base and move identification of constraints to growth and asset up the value chain in agriculture, manufacturing, accumulation, is presented in the next subsection. and services. Constraints to economic growth Although not significantly higher than in peer countries, Cambodia does have notable A growth diagnostics methodology was used infrastructure constraints, and urbanization to identify critical constraints to Cambodia’s is still incipient. As discussed earlier, according CAMBODIA: Sustaining strong growth for the benefit of all economic growth going forward. As discussed to international indices, the transportation and earlier, Cambodia has been among the fastest- connectivity infrastructure seems to be similar to growing countries in the world for more than two those of Cambodia’s structural peers and competitors decades, and its rapid economic growth thus far has but lags behind those of Vietnam and Thailand. The been sustained in part by increases in labor force energy generation and transmission infrastructure and productivity (from a low base). Now Cambodia has expanded noticeably, and reliability has is facing rising challenges as a lower middle-income increased in recent years. However, significant economy. The pace of capital accumulation seems geographical differences still exist. Urbanization in to have been slower than in other countries during Cambodia is incipient, and its pace is slower than fast-growth periods (Vietnam, China, and Thailand), in African countries at the same income level. If not and local entrepreneurship in the manufacturing well managed, negative agglomeration externalities sector seems to be limited. Growth projections (such as traffic and pollution) could pose a bottleneck suggest that Cambodia would need to increase its to competitiveness in the future. physical and human capital significantly to reach upper middle-income status by 2050. In this setting, A series of bureaucratic hurdles and informal the growth diagnostics framework proposed by fees hinder the “appropriability” of returns Hausmann, Rodrik, and Velasco (2005) was applied on capital and pose the most immediate 115 Box 3: Asset-based framework for achieving poverty reduction and shared prosperity Reducing poverty and improving shared prosperity depend on boosting the income-generating capacity of households. At the macro level, this is determined by how much economic growth creates productive economic opportunities for households to increase their labor income and how social policy affects the distribution of household’s assets and hence their ability to partake in the economic opportunities presented by high economic growth, in addition to the transfer of non-labor incomes to poor households. Viewed from the micro level, the income-generating capacity of households is determined by the following four factors: (i) household endowments or stock of assets, including human capital, physical capital, financial assets, natural capital, and social capital; (ii) intensity of use of these assets, meaning the extent to which households are able to use their assets to generate income, including the employment of labor either in formal employment or self-employment; (iii) prices or returns to assets (e.g., interest rates and rents) and wages; and (iv) transfers from the government (social transfers) and remittances (see Bussolo and Lopez-Calva, 2014). The rate and pattern of economic growth determines employment creation and real wage growth, thus directly affecting the intensity of the use of labor assets and their returns, while government social policies also have the potential to alter household endowments or their intensity of use (e.g., by affecting labor force participation). Figure 51. Asset-based framework for achieving poverty reduction and shared prosperity CHAPTER 6: Priority interventions to encourage sustainable development GROWTH External Conditions Sector Composition Key Prices Sustainability Sustainability Income Net Intensity Prices Transfers Generation Assets of Use Capacity DISTRIBUTION Change in income generation capacity Source: Adapted from Bussolo and Lopez-Calva, 2014. 116 Policy Priorities bottleneck to sustaining strong economic Relatively well-functioning markets in Cambodia growth. As discussed earlier, Cambodia is one of are the result of laissez-faire policies, although the countries in the world in which it is most costly a series of information failures exist. Information and lengthy to start a business, and entrepreneurs externalities related to the cost of discovery and report the largest bribery incidence in ASEAN. innovation appear as a potential constraint to growth. On-road informal toll and informal forwarding Evidence suggests that firms in Cambodia, especially fees significantly increase the costs of trading foreign-owned export-oriented manufacturers, across borders. The high cost of electricity adds to undertake little innovation, which poses a challenge these micro-level challenges, significantly eroding to economic diversification going forward. Cambodia’s external competitiveness, jeopardizing its ability to further unleash entrepreneurship, In the agriculture sector, coordination to address and reducing the returns on capital by private market failures seems to pose a challenge. A sector actors. In a moment in which firms are positive example is the lack of interventionism in facing a severe reduction in profit margins due to rice and rubber during the commodity price boom, raising salaries and large US dollar appreciation which facilitated strong agriculture growth and (30 percent vis-à-vis the Euro since end 2014), faster poverty reduction than in other countries addressing these constraints is a priority of the that have been relying on subsidy schemes or price highest level, in order to ensure the survival of the controls. However, access to both inputs and markets existing businesses and facilitate the arrival of a for farmers is constrained in terms of connectivity new generation of enterprises. and information. The Cambodia Rice Federation is trying to address some of these market failures, Overall macroeconomic stability has favored while subsector coordination policies for other economic activity in Cambodia, but difficulties emerging commodities (including rubber, cashew, in scaling up public investment and U.S. dollar soybean, and aquaculture) are yet to be developed appreciation under dollarization could constrain (ADB, 2014). In other sectors, the Cambodia Garment growth going forward. As the economy became Manufacturers Association and the Cambodia Tourism quickly dollarized as a result of large foreign aid and Association defend sector interests and coordinate capital inflows, the stability of exchange rate of the directly with authorities on policy and regulation. CAMBODIA: Sustaining strong growth for the benefit of all Khmer riel vis-à-vis the U.S. Dollar has constituted a credible nominal anchor for foreign investors, Economic growth in Cambodia has been driven helping to reduce macroeconomic volatility and by large foreign capital inflows and fast domestic maintain low levels of inflation. However, the recent credit growth, while the development of domestic appreciation of the U.S. dollar has eroded Cambodia’s capital markets has been limited. Following external competitiveness and revealed some of the Hausmann et al. (2005), the cost of financing limitations of dollarization: lack of exchange rate domestic investment influences economic growth. flexibility, ineffective monetary policy, and incentives The attainment of peace and stability in Cambodia, for economic actors to invest in the non-tradable macroeconomic stability and absence of exchange sector (rather than in manufacturing, for example). rate risk, and capital account openness and lack of On the fiscal side, Cambodia has been able to attain restrictions have facilitated large FDI and external fiscal consolidation and presents low risk of debt financing, fueling economic growth. The domestic distress (IMF, 2016). Cambodia would thus have the banking and microfinance sectors have developed fiscal space and savings for needed investments; very significantly over the past two decades, with however, severe weaknesses in public investment increased financial inclusion in terms of credit and asset management limit the ability of authorities growth, while access to bank accounts and deposits to ramp up public infrastructure. remains low by international standards. The cost of 117 financing is not significantly higher than in other demographic composition (labor), education developing economies, but since most borrowing attainment, and health status; (ii) access to land; is taking place in U.S. dollars, the risk differential and (iii) financial access (Box 3; Bussolo and Lopez- incorporated into interest rates is substantial (if Calva, 2014). Shocks pose a risk to both the level compared to borrowing in the United States). and productivity of these assets, therefore the Finally, it should be noted that the lack of developed nature of risk mitigation mechanisms available capital markets, with just an incipient stock market to households becomes an important driver of and lack of a domestic bond market, means fewer household income-generating capacity. portfolio alternatives for investors, which results in a propensity to invest in the real estate sector, which A “ladder of economic success” clearly shows could result in higher macro-financial risks. how household asset endowments and low vulnerability distinguish households with high To summarize, factors hindering the prospects for moving into economic security. “appropriability” of returns on capital, such as Cluster analysis of the entire welfare distribution high costs of firm establishment and operation, was used to pinpoint those characteristics that and low human capital appear to be the distinguish the poor and near-poor from the better- most immediate constraints to private sector off (see Annex 3). The outcomes from the cluster development and sustained growth. In addition, grouping are presented in the “ladder of economic Cambodia would need to undertake a series of success” for Cambodia (Table 10), which reveals four structural reforms to sustain strong economic groups with a different mix of asset endowments, growth in the long run, including fostering livelihoods, and vulnerabilities. Economic security investment and savings through public policies is highest among households with more assets and capital market development, supporting (mainly high human capital and land) and also with innovation, and improving market access in a non-farm source of income (groups 1 and 2 in CHAPTER 6: Priority interventions to encourage sustainable development agriculture. While less of a current constraint to Table 10). About 37 percent of Cambodians fall into growth, there are also opportunities to enhance the first category of high human capital and non- the resilience of the financial sector under booming farm livelihood, which has the lowest likelihood of credit, promote the use of the national currency being in extreme poverty and highest likelihood of to progressively regain exchange rate flexibility, being an emerging consumer class. At the bottom and plan ahead to mitigate emerging urbanization end, the chances of attaining economic security are externalities. Figure 52 summarizes the results of lowest (15 percent) and those of being moderately applying the growth diagnostics framework by or extremely poor highest among the group of Hausmann et al. (2005), based on the analysis of the households headed by older people with no formal different constraints discussed above. education and with a very small share of household members with secondary education. This group Constraints to accumulation of household constitutes about 15 percent of the population. assets Somewhat better off than this group are those sharing similar characteristics but with slightly In addition to the availability of better more land (average 1.6 hectares) and a smaller economic opportunities, poverty reduction share of the elderly and female-headed households. and future upward economic mobility will These comprise the majority of the population (44 depend on an increase in the asset base of percent). the poor and near-poor and their resilience to shocks. The key household assets are (i) The ladder shows that low attainment of human capital characterized by household secondary and higher education is a major 118 Policy Priorities Figure 52. Identification of constraints to economic growth in Cambodia Constraints to growth, private investment & entrepreneurship High but declining return to economic activity Cost of finance Large FDI and Average local Social returns Low appropriability external financing finacing Incipient Government Market Low Growing Good failures failures domestic financial sector, Limited k geography urbanization/ agglomeration savings with risks markets Multi-stackeholder Cost of coordination innovation Low human Average in agriculture capital infrastructure Micro risk: Macro stability Degree of constraint corruption, high but constraints to ER Very high High cost for firms and monetary policy Medium Low Source: adapted from Hausmann, Rodrik, and Velasco (2005). constraint to the economic mobility of the poor increasing, particularly for tertiary education, and near-poor. In contrast to the most successful with an additional year of schooling raising group, the bottom groups have much lower earnings by about 5.1 percent a year.  Clearly, low secondary education attainment which restricted secondary school completion among the poor CAMBODIA: Sustaining strong growth for the benefit of all their potential to obtain non-farm wage jobs. remains a constraint to their economic mobility. About 76 percent of household members in the Moreover, the gender earnings gap in Cambodia most economically secure group have at least lower narrows significantly with the attainment of upper secondary education, compared to just 17 percent secondary education and above. Thus, addressing among the least successful group. All households in the low education attainment challenge, as well the least successful group are headed by a person as improving learning outcomes from secondary with no formal education. In contrast, all household education and above, is of highest priority. heads in the most successful group have some formal education. About 61 and 83 percent of Disadvantages in the early years of life are much households in the top group have a non-farm wage larger for the poor and prevent realization of their income and a non-farm income source in general, full potential, partly contributing to their lower compared to just 35 and 44 percent in the poorest educational attainment and earnings. Evidence group. As shown in Table 11, the probability of demonstrates that early life under-nutrition, lack of having a wage job is much greater for people with early stimulation and learning, and/or exposure to higher levels of education attainment, particularly toxic stress at early ages has an irreversible impact secondary, vocational, and university education. on young children’s brain development (Grantham, Returns to education in Cambodia are high and Fernald and Sethuraman, 1999). In Cambodia, 33 119 Table 10. Classification of households by endowments, livelihood, and vulnerability (2013) Young, high Young, Older, low Older, low human moderate human human capital, human capital, capital, non-farm capital, moderate average households large land land owners land (1) (2) (3) holdings (4) Economic Average daily consumption 7.12 5.74 4.54 4.11 status per capita (2011 PPP) Emerging consumer class (%) 52.2 39.0 20.2 15.8 Extreme or moderately poor 6.5 15.3 23.7 31.7 Demographics Household head age 42.4 45.2 48.3 52.9 Dependency ratio 63.9 74.7 59.5 61.2 Female household head 0.10 0.11 0.20 0.47 Share of old age adults 0.16 0.28 0.24 0.34 Household Household head has no 0.00 0.21 0.00 1.00 endowments schooling Share of household members 0.76 0.28 0.29 0.17 with at least lower secondary school Share without land 0.58 0.27 0.26 0.27 CHAPTER 6: Priority interventions to encourage sustainable development Agriculture land, average 1.8 2.5 1.6 1.3 among land owners Livelihood Has a household member 0.61 0.44 0.42 0.35 engaged in non-farm wage job Has a non-farm income 0.83 0.59 0.58 0.44 source Share receiving remittances 0.23 0.40 0.50 0.55 Vulnerability At least one household 0.01 0.69 0.00 0.01 member hospitalized in past 12 months Household borrowed to pay 0.00 0.43 0.00 0.00 for health expenditures Location Proportion in urban (%) 0.44 0.10 0.12 0.08 Overall share Group share 36.73 4.44 43.81 15.02 Source: World Bank staff calculations using Cambodia Socioeconomic Survey, 2013. 120 Policy Priorities Table 11. Education determines avenues to better prosperity Effect on probability of having Effect on probability of having wage job full-time wage job Primary 5.9% 6.1% Lower secondary 7.7% 7.6% Upper secondary 20.9% 19.8% Vocational education 33.6% 26.7% University 54.6% 52.9% Source: World Bank staff calculations using Cambodia Socioeconomic Survey, 2014. percent of the children were stunted in 2014, and large majority—especially the bottom two groups— are likely to suffer lifelong impacts on educational still depend on agriculture, yet they have a modest attainment, productivity, and earnings. In addition, amount of land. On average, households in the enrollment in preschools in Cambodia, at 17 bottom group own 1.3 hectares of land, and those percent of the relevant age cohort in 2014, remains in the second lowest group own 1.6 hectares of land. significantly below the average for lower middle- There is limited room for further land expansion. income economies (26 percent).85 Both dimensions Rather, sustainable management of the natural define the high inequality of opportunity at the early resources they depend on—land, forestry and age. Children in the poorest quintile are more than water—has become more critical for their survival. twice as likely to be stunted than those in the richest The last decade’s expansion in land cultivation led quintile (42 percent and 19 percent, respectively) to deforestation which increased soil erosion, thus for example. Because children in poor households lowering agricultural productivity. In addition, these are less likely to be enrolled in early childhood households’ livelihoods are highly vulnerable to education, they miss the best opportunity to extreme weather events, and rising temperatures, CAMBODIA: Sustaining strong growth for the benefit of all maximize their development, which dims their labor changes in rainfall patterns, and increased variability market prospects and future income-generating have also lowered productivity. Thus, for these potential. Investing in early years as a foundation agriculture-dependent but land-poor households, for success is thus a high priority, especially for modernizing agriculture to increase the productivity providing equal opportunities for all. of their land and farm profitability, together with increased resilience to climate-related shocks and With modest land holdings among the bottom environmental sustainability, offer the best path to groups, degradation of natural resources and increasing incomes. high weather variability in the face of climate change emerge as critical constraints to income Among the asset-rich, high vulnerability growth of the poor. Those with higher educational to shocks—especially catastrophic health attainment have mostly transitioned out of expenditures—have been a drag to achieving agriculture so have not been constrained by lack further economic mobility. On the cusp of of land, and they are in occupations that are less economic security is a second group of people vulnerable to extreme weather events. However, a consisting mostly of land-rich households (2.5 ha per household) but with low human capital and high 85  World Development Indicators. vulnerability to shocks. This small group (4.4 percent 121 of households), which is non-poor but generally Improving public service delivery through economically insecure, was more likely to have strengthening public administration and public experienced a health shock. About 69 percent of financial management will be critical for building households in this group had at least one household household assets, mitigating risks, and delivering member who had been hospitalized in the 12 months agriculture services. Cambodia performs poorly prior to the survey, and 43 percent had to borrow to on both the quality and equity of service provision pay for health expenses. High OOP spending seems as evidenced by poor learning outcomes, and to have pulled them down. While catastrophic, the significant gaps remain in access to services between share of such people affected is limited, hence this rural and urban areas. An example of poor learning constraint is of moderate priority. outcomes is that half of the children in grade 3 could not read at the level required, with the percentage The poorest in Cambodia are also labor- being even higher in rural areas.86 Apart from quality constrained, highlighting the need for challenges, governance challenges are at the core strengthening social protection systems, of OOP spending resulting in uneven access to especially for female-headed households services. This necessitates reforms to equalize and and the elderly. The share of female-headed strengthen public service delivery in order to build households in the poorest group is very high a strong asset base for households and increase (47 percent), and one in three of the household their income-generating capacity. Beyond social members are 65 years of age and above. In the sectors, public administration constraints also absence of sound social protection and a pension hamper the ability of effectively expanding access system, these labor- and asset-poor households and effectively delivering economic services such as are vulnerable to falling into poverty or have water, sanitation, and electricity. Reforms in this area limited opportunities for upward mobility into are thus considered a matter of high priority. economic security. Furthermore, the CSES 2014 CHAPTER 6: Priority interventions to encourage sustainable development reveals that female-headed households face higher The ladder underscores the importance of levels of food insecurity than men, as 17 percent building household assets, minimizing household of them had to engage in activities such as selling vulnerability, and creating opportunities for household assets, reducing essential non-food growth. There is a clear correlation between expenditures, spending savings, borrowing money, education, land holdings, non-farm income, and selling house or land, or withdrawing children from the likelihood of being economically secure. The school due to not having enough food or money to profile of the four groups suggests that increasing buy food in the previous 30 days. The risk of inter- educational attainment, and the diversification out generational transmission of poverty is higher in of agriculture associated with it, offers the highest female-headed households. The population ages chances of transitioning into economic security. 16-18 in households with female heads has a lower Secondary, vocational, and/or tertiary education probability of studying at school, which implies that significantly increases the probability of having a children in female-headed households are less likely wage job. At the same time that efforts are made to to have access to higher education. An effective foster enrollment in secondary education and above, pension system and social safety nets would help it is important to invest in pre-primary education, lift this group of people out of poverty. However, nutrition, and water and sanitation to tackle stunting, it is important to keep in mind that Cambodia is an outstanding problem that challenges efforts for enjoying a demographic dividend at the moment human capital formation. This would also require and has one of the youngest populations in the improved service delivery to reduce gaps in access region, which makes the introduction of a pension system a moderate priority. 86  UNESCO, Early Grade School Assessment, 2014/15. 122 Policy Priorities and ensure quality outcomes. For those households Reducing the costs of firm establishment who are landowners, agriculture can also be a path and operation, including electricity costs to economic security if vulnerabilities are minimized, and trade transaction costs including those stemming from environmental degradation. Finally, mitigating the impact of shocks To regain competitiveness in the short to by reducing OOP expenditure in the health sector medium run, Cambodia has opportunities and expanding social protection would be important to reduce the costs of firm establishment. for supporting household income growth. First, creating a single window to streamline the procedures and costs for opening a business— 6.2 Pathway 1: Increasing economic which are currently conducted at the Ministry competitiveness and diversification to of Labor and Vocational Training, Ministry of Commerce, and tax administration—would sustain strong growth and create jobs help facilitate entrepreneurship as well as the formalization of firms. Other measures aimed at Rapid growth in exports has been an important facilitating firm establishment would be reducing driver of growth and employment thus far or eliminating the minimum capital requirement but may not be sustainable in the future to be deposited in a bank before the company is unless Cambodia makes the economy more registered; removing the obligation to conduct competitive and more diversified. As discussed an initial check for uniqueness of the company earlier, Cambodia faces new challenges as a lower name and obtain name approval at the Business middle-income economy and is expected to see a Registration Department (these checks could be progressive decline in preferential trade treatment included as part of the back-office review of a and an increase in labor costs, coupled with more request); and abolishing the requirement to have intense competition in garments from neighboring a company seal. Most of these proposed policy countries such as Vietnam and Myanmar. Moreover, options are low-hanging fruits that, with sufficient under the managed float/peg, the recent U.S. dollar leadership and institutional enforcement, could be appreciation makes Cambodian goods relatively relatively easy to implement in the short run. Full more expensive in the European markets and vis- implementation of the online registration system à-vis other competitors. In order to sustain strong CAMBODIA: Sustaining strong growth for the benefit of all launched by the Ministry of Commerce would help and inclusive growth, Cambodia would need to simplify firm establishment procedures. enhance its productivity further by increasing competitiveness and diversification. This could be In addition, improving the overall business attained through a series of measures, including environment by abolishing unnecessary introducing concerted public and private procedures and informal fees would facilitate sector efforts to facilitate firm operations and firm operation, including for female-owned reduce costs, building the legal framework and businesses which comprise the majority of firms. the capacity needed for more efficient public A Special Task Force could be created, aimed at investment and asset management to provide reviewing, simplifying, and abolishing unnecessary infrastructure, facilitating domestic savings as well procedures/licenses and reducing or removing as investment in the tradable sector (including unreasonable fees for all aspects of business tourism), strengthening regulation and supervision operations, including dealing with construction of the financial sector to mitigate potential crises permits, paying taxes, import-export procedures, stemming from fast credit growth, and modernizing and registering a property. For example, opening the agriculture sector to unleash its food-security a new hotel business requires obtaining nine and export potential (Table 12). 123 124 CHAPTER 6: Priority interventions to encourage sustainable development Table 12. Pathway 1: policy options to increasing economic competitiveness and diversification Pathway Development Selected policy option Selected policy option Additional policy option Additional policy priority areas 1 2 3 option 4 i. Increasing 1. Reducing the cost Establish a special task Reduce the cost and Eliminate the minimum Lower electricity costs economic to firm establishment force to improve the time for trading across capital requirement and by adopting downward competitiveness and operation, overall ease of doing borders by establishing remove the obligation to mid-term tariffs and and diversification including electricity business by abolishing a National Single conduct an initial check for ensuring competitive to sustain strong costs and trade unnecessary procedures Window, reviewing uniqueness of company bidding for large growth and create transaction costs and informal fees Camcontrol’s mandate, name when opening a projects jobs and establishing a business National Logistics Council 2. Boosting public Improve public Develop an internal Streamline existing and private investment and asset bond market (including investment incentives, investment to management by sovereign and private) shifting from tax holidays support the tradable passing a PIM Sub- to facilitate the into incentives that foster sector decree and developing financing of investment private investment in project selection and and to regain exchange machinery and research implementation manuals rate flexibility 3. Strengthening Introduce a Risk-Based Enhance crisis Strengthen macro- Adopt digital finance regulation and Supervision approach preparedness and prudential regulation, to further increase supervision of the through regulation establish a financial data quality, and oversight financial inclusion and financial sector to on key objectives safety net, including measures (including boost domestic savings mitigate risks from and requirements by establishing an loan classification, MFI strong credit growth, and provision of autonomous deposit guidelines, IFRS adoption) while building further methodology to the protection institution financial inclusion sector 4. Fostering Facilitate knowledge and Enhance systems for Enhance the impact and Influence the supply agricultural technology adoption managing quality and sustainability of irrigation, and demand for modernization through farm advisory food safety, strengthen including by applying healthy foods, services, national the linkages between clear procedures and including through research councils, farmers and agro- adequate financing for incentives, regulations, PPPs, agribusiness enterprises, and O&M, increasing support information, incubator programs, and introduce a coherent for water user groups, and and through the competitive grants for approach to ‘brand’ facilitating the adoption introduction of R&D Cambodian food and of alternative small-scale fortification policies agriculture irrigation technologies Source: World Bank staff analysis in consultation with stakeholders. Policy Priorities different licenses from five institutions.87 Further In order to improve energy efficiency and lower efforts to curb the informal fees and gifts expected electricity costs, a stronger institutional and under regular inspection and when dealing with regulatory framework is needed, including for construction permits, operation and import licenses, tariff-setting. Some suggested measures include and transportation and logistics would also help setting up a declining medium-term tariff policy, reduce firm operation costs significantly. In particular, regular sharing of technical and commercial female-owned businesses—which comprise the performance of energy companies, developing a majority of firms and face additional constraints as medium-term system expansion plan informed by discussed earlier—are expected to benefit from a public consultation, developing a stronger water reduction in informal fees and automation of the planning and licensing system, and ensuring that registration process. large projects are competitively procured, with the help of experts and quality advisors. This would Further gains in trade facilitation and connectivity help attract greater private sector investments could be achieved by reducing the costs and time and manage the long-term contingent liabilities involved in trading across borders. First, potential associated with investments in energy infrastructure. reforms could include completing the automation of It will be important to fully assess the environmental border procedures by establishing a National Single and social impacts and externalities of hydro and Window, following the removal of unnecessary coal-fired generation, while looking closely at the documentation requirements, such as the Import/ potential for cost-competitive renewable energy Export Permit for non-sensitive goods (which could such as solar. In addition, the introduction of smart be replaced with a renewable Import/Export License) meters at consumer ends, inter-connection points and the Insurance Certificate (which is not required for distribution companies, as well as SCADA systems in many other countries). Second, Camcontrol’s in the transmission grid, backed by a well-managed mandate at the border could be reviewed, and it management information system, would improve could be established as an autonomous statutory the efficiency and utilization rate of power systems. Food Safety Authority reporting to a Ministerial Finally, given the smaller size of the power system, Council to avoid current overlaps with the customs a comprehensive policy for expanding regional authority in border management. Third, a National cooperation with neighboring Vietnam, Lao PDR, and CAMBODIA: Sustaining strong growth for the benefit of all Logistics Council (NLC) could be established, Thailand would help lower system costs, reduce the supported by a Secretariat spearheaded by the generation reserve margins needed for the system, Ministry of Public Works and Transport, and working and utilize expansive large power assets. in close consultation with the relevant business organizations. The NLC could work to improve Boosting public and private investment in logistics in Cambodia to support the successful infrastructure and machinery acquisition realization of the Industrial Development Policy while developing capital markets (IDP) 2015-2025 and to formulate and monitor the implementation of a National Logistics Blueprint To sustain rapid growth in the long run, to ensure that Cambodia’s hard and soft logistics Cambodia needs to boost public investment infrastructure supports trade expansion. and capital accumulation while at the same time making its fiscal and monetary policy more 87  Business registration (Ministry of Commerce), hotel license effective. Cambodia currently has fiscal space to (Ministry of Tourism), tax registration and VAT number, and tax on ramp up public infrastructure projects, which could sign board (General Department of Taxation), location approval help compensate for the decline in donor-funded license and permit on sign board (municipality) registration for opening enterprise, establishment ledger, payroll and capital expenditure that has taken place since 2011. internal work rule (Ministry of Labor and Vocational Training). 125 However, this would first require strengthening are implemented more effectively. This would public investment and asset management, given the require enhancing the institutional framework for current reliance on donors and lack of standards and government-funded investment through passage weaknesses in the implementation of government- of a PIM Sub-decree, the development of project funded public investment projects. Cambodia selection and implementation manuals, as well could also streamline its existing investment as capacity building at core and line ministries. In incentives, moving away from tax holidays and into addition, enhancing donor coordination, avoiding a more targeted incentive system that fosters private a piecemeal approach to project selection, and investment in machinery and R&D, which would ensuring adequate operation and maintenance support economic diversification and increased budgets would help ensure the effectiveness and value addition while containing tax expenditure. In sustainability of externally funded projects. Finally, addition, promoting the use of the national currency the costs of responding to disasters could be reduced and developing an internal bond market would help by strengthening the resilience of Cambodia’s provide a higher degree of exchange rate flexibility infrastructure, such as constructing flood-resilient in the medium run, which would help the economy roads, adopting minimum building standards, regain competitiveness in the context of U.S. dollar updating urban plans, and raising the platforms appreciation under dollarization as well as lower the of wells and sanitation facilities to prevent flood proclivity to invest in the real estate sector, which waters from inundating them. Cambodia’s road asset is prone to booms and busts. The proposed policy management system also needs to be strengthened options in this area for development are reforms further, which would require more precisely that need time to be implemented in order to be quantifying and justifying budget requirements; successful in the medium to long run, except for the prioritizing expenditures for the national, provincial, investment incentives, which are more of a stroke-of- and local networks; guiding the implementation a-pen reform. of maintenance in a cost-effective manner; and CHAPTER 6: Priority interventions to encourage sustainable development monitoring the attainment of articulated goals. Cambodia needs to build up public investment and asset management to help boost A new Investment Law could help Cambodia infrastructure in an effective and sustainable adopt international best practices and reduce way, since it has been mainly relying on donors tax expenditures. Approximately 75 percent of for such investments thus far. As discussed earlier, the firms surveyed in the garment, footwear, and Cambodia keeps depending on development other manufacturing sectors did not consider any partners to build infrastructure, and only small-scale alternative location to Cambodia in their investment projects are implemented through government decisions, which would imply that some of the funding. An assessment of public investment existing investment incentives could be redundant management found that Cambodia does not (World Bank, ADB, 2014). Tax expenditure resulting have formal guidelines for feasibility studies and from existing exemptions and incentives is estimated project selection for government-funded projects. to have amounted to at least 5.7 percent of GDP Moreover, just a handful of ministries have the in 2015 (Stern et al., 2017). This would call for the capacity to build needed infrastructure, and most streamlining of tax incentives in a new Investment of them do not seem to have minimum quality Law, as envisaged in the Industrial Development standards and implementation manuals in place, as Policy of the RGC. First, Cambodia could consider is the case for roads and canals (Minh Le et al., 2017). limiting existing corporate income tax holidays, and Strengthening public investment management (PIM) moving towards targeted cost-effective measures can not only ensure that such investment is allocated such as accelerated depreciation, tax deductions, to high-return projects but also that these projects and/or soft loans for the acquisition of machinery 126 Policy Priorities and equipment, investment in R&D, and staff investment and progressive de-dollarization. This training—this would help increase the productivity would ultimately help attain greater exchange rate of the physical and human capital stock and foster flexibility and regain monetary policy independence. diversification of the economy by encouraging investment into higher value-added sectors. Second, Strengthening regulation and to reduce tax evasion, VAT exemptions on imports supervision of the financial sector could be replaced with tax credits as per international best practice, which would not entail any additional to mitigate risks from strong credit tax burden on investors. Third, Cambodia could growth, while building further consider streamlining the approval process for financial inclusion incentives, removing minimum capital requirements, making incentives time-bound, and granting them Further enhancing regulation and supervision of to firms instead of on a project-by-project basis. the financial sector would help prevent potential Fourth, further investor protection assurances could negative impacts from rapid credit growth on be introduced. macroeconomic stability, poorer households, and the environment. While fast expansion in credit The development of a domestic bond market, has been one of the main factors fueling strong and coupled with measures aimed at promoting the sustained economic growth in Cambodia, it is critically use of the national currency, would help in both important to harness the mounting risks, especially fostering domestic savings and progressively those stemming from a potential construction attaining greater exchange rate flexibility to bubble and over-indebtedness. Over-indebtedness regain external competitiveness. Investment into is emerging for rural households, in particular, the tradable sector also needs to be fostered, as closely linked to the boom of the loosely regulated large capital inflows with limited investment options microfinance sector and other informal/unregulated have contributed to rising speculation biased toward lending activity such as those under shadow banking channeling private investment and credits into the and private money lending schemes. In this regard, a non-tradable sector, fueling the construction and set of complementary measures would be aimed at real estate boom. Intervention is justified by the fact mitigating emerging risks by further strengthening CAMBODIA: Sustaining strong growth for the benefit of all that construction and real estate often do not have banking and microfinance supervision, introducing the same impact in terms of recurrent employment a risk-based supervision (RBS) approach, improving that the exporting sector has, and it would also help data quality and oversight, strengthening macro- preserve macro-financial sustainability and prevent prudential regulation, and enhancing crisis bubbles. Developing a domestic debt market (both preparedness and establishing a financial safety net. public and private) and starting to issue sovereign Close monitoring of shadow banking and private debt can promote domestic and foreign savings and non-governmental money lending activity mobilization, which will enable scaling up of is also important. Finally, a series of measures investment and capital stock accumulation to sustain could be introduced to increase access to deposits high economic growth. In the medium run, market and savings, which have been traditionally low measures aimed at fostering the use of the Khmer in Cambodia. In support to the previous area for riel, coupled with the progressive development of development, ideally savings would be channeled capital and bond markets, could help provide sources through the financial sector into further investment of long-term funding for the corporate sector and in the economy. establish alternatives to investment in construction and real estate. Introducing incentives to deposit and An RBS approach could be introduced to update save in local currency would also support both higher the existing framework and comply with the latest 127 international Basel standards. This would require a It will also be important to support crisis series of sequential steps. First, technical committees preparedness, establish a financial safety net, and and working groups could be established to take strengthen financial inclusion. This would require charge of the formulation of the RBS regime, including establishing an inter-ministerial Macro-Prudential key country-specific objectives, requirements, and and Financial Stability Committee for collaboration methodology. Second, a concrete road map and among government agencies and ministries as well action plan for the development of supervisory as strengthening the current crisis management resources and capacity building strategies could be framework in order to better anticipate and manage established to ensure execution of the RBS and other financial crises. It would also be beneficial to expand related supervision and operational activities. Third, access to enable more people to use bank deposits, guidelines for applying a risk-based approach to in conjunction with the development of an action anti-money laundering and combating the financing plan for establishing an autonomous deposit of terrorism could be adopted and implemented. protection institution to provide guarantees for Fourth, a reliable system of cross-checks could be set deposit accounts in regulated financial institutions, up to support customer feedback. thereby enhancing public trust in the banking system. Greater financial inclusion, together with A series of macro-prudential, data quality, and improved regulation and supervision, would enable oversight measures would help strengthen Cambodia to further enhance its financial stability, as financial sector stability. Such measures include banks would have a more solid and broad funding revising the formula for calculating banks’ liquidity base which would reduce the likelihood of large to capture the time dimension and ensuring withdrawals, particularly during times of stress consistency in loan classifications across different (Sahay et al., 2015). financial institutions; implementing stricter loan- to-value ratios for the non-productive sector, Digital finance could be a way to further increase CHAPTER 6: Priority interventions to encourage sustainable development introducing limits on multiple loans, and introducing financial inclusion and boost domestic savings. loan-size-to-income limits for household lending Cambodia could foster domestic savings by facilitating to prevent speculative bubbles in the construction access to banking services and mobile banking. and real estate sector and over-indebtedness in Authorities could partner with financial institutions the household sector. In addition, authorities could to persuade borrowers to establish effective consider developing secondary regulations specific linkages between loans and deposits, particularly to the microfinance sector and adopting lending by opening and maintaining savings accounts at guidelines to enhance the soundness of the portfolio financial institutions where they borrow funds, and prevent predatory lending to households with since Cambodia has one of the largest proportions little capacity to repay. For example, limits  on loan of population that borrows money but one of the size to  income could be established, requiring lowest proportions of population that has deposit greater provisioning  for loans to borrowers for accounts at financial institutions. Digital finance is whom repayments represent more than 75 percent being adopted around the world as a cost-effective of net reported income, and coverage of guarantors mechanism for banks and other financial institutions and household information in the Credit Bureau to reach out to new customers rapidly without the of Cambodia (CBC) could be expanded. Finally, need to set up new physical branches. As part of enhancing the capacity of financial institutions in strengthening the regulation and supervision of the accounting and auditing with the aim of full adoption financial sector, Cambodia could focus on enhancing of the International Finance Reporting Standards the legal, regulatory, supervisory, and institutional (IFRS) would strengthen inter alia financial disclosure framework that supports financial innovation while and financial information transparency. protecting consumers. This could be accompanied 128 Policy Priorities by implementation of the national payment system public and donor spending in agriculture, although strategy to develop a reliable and real-time payment it has thus far played only a minor role in fostering and settlement system which supports economic agricultural productivity or diversification and is development in the country. In addition, to mitigate a necessary but not sufficient part.88 Institutional potential shocks at the household level that would mandates and staff incentives need to be shifted hamper the ability to save effectively, a microinsurance from an engineering to a service delivery approach, sub-decree could be introduced to help reach the and focus on ensuring the functioning of existing poor and to extend insurance coverage products (life, irrigation schemes. Several measures could help in property, and third-party liability motor insurance) to this regard: better integrate water resource and soil an untapped pool of people, while improving proper assessments when determining the feasibility of new regulations and concrete administrative processing infrastructure investments, apply clear procedures facilities for claims. and adequate financing for irrigation system operation and maintenance, increase technical Fostering agricultural modernization in the and financial support for farmer water user groups, aftermath of the commodity price boom support in-field irrigation/drainage investments by farmers, and facilitate the adoption of a range of In the coming years, different sources and drivers alternative small-scale irrigation technologies.89 In of inclusive agricultural growth will need to making efforts to intensify production, Cambodia be nurtured. This could involve a combination of will need to promote good agricultural practices and increased irrigation, more diversified production avoid a trajectory toward excessive use of fertilizer systems, and increased value addition, which and agro-chemicals, an unsustainable development would contribute to higher productivity (of which has occurred in some irrigated agriculture labor, land, and water), greater weather/climate systems elsewhere in East and Southeast Asia.90 resilience, and higher farm income and supply chain employment opportunities. Cambodian agriculture Facilitating knowledge and technology adoption is expected to find it increasingly difficult to compete would help spur broader productivity gains in internationally, regionally, and locally on the basis of Cambodian agriculture. Small farmer knowledge low-cost, high-volume production. Cambodia could CAMBODIA: Sustaining strong growth for the benefit of all strengthen the availability of core public goods while 88  Dry season paddy production accounts for only 13 percent of annual national production. The bulk of Cambodia’s strategically aiming to differentiate its agriculture expanded fish production has come from farms practicing (and agro-industry) on a qualitative basis—reliably rice/fish rotations based upon the ebb and flow of natural delivering higher-quality products and safer food floods rather than organized irrigation systems. Very little of Cambodia’s increased feed and industrial crop production has that is more sustainably produced with credible come from irrigated land. assurances. At the same time, Cambodia’s agriculture 89  In recent years, there has been a very large increase in and overall food system needs to play a stronger role donor (loan-financed) irrigation infrastructure investment, yet only a few schemes appear to be applying these principles in improving local nutritional outcomes, ensuring or directing attention toward these types of priorities. Most that a diverse range of high-nutrient foods is readily irrigation projects focus on rice production, although farmers are increasingly using irrigation on fruit and vegetable farms. available and affordable. Urbanization brings new Drip irrigation is the fastest-growing irrigation technology opportunities yet also major challenges for fostering in Cambodia; it reduces water and fertilizer requirements, improved diets, and the state would need to play improves yield and quality of vegetables, and reduces diseases. Sprinkler irrigation could also be a way to make better use of an active role in influencing both the supply and water (BD Link, 2017). demand for healthy foods. 90  In Vietnam the effects of increased flooding downstream the Mekong Delta reduced floodplain benefits (declining sediment and nutrient load --also resulting in increased Cambodia could intensify agricultural production fertilizer and pesticide use), reduced groundwater recharge, through irrigation. Irrigation continues to dominate and resulted in lower productivity from the third rice crop. 129 and technology adoption, and the delivery systems Strategies of quality differentiation can be for such technologies, lag behind those of other pursued further by enhancing systems for middle-income Southeast Asian countries. Non- managing quality and food safety, strengthening traditional and non-state forms of farm advisory the linkages between organized farmers and and other technical services could be encouraged, agro-enterprises, and introducing an overall including those applying ICT.91 This includes mixed coherent approach to ‘brand’ Cambodian farming, as well as agro-forestry and agro-fishery, food and agriculture. The latter would also have due to their higher incomes, greater resilience, and positive spillovers for tourism. Experience from lower environmental footprint. National quality elsewhere—including neighboring Thailand and and performance standards (and other regulations) more distant Chile and Kenya—illustrates that should be applied for the import, sale, and use of most of these areas require very close collaboration farm machinery, while bottlenecks are removed for among government, the private sector, and NGOs the further development of a market for agricultural as well as considerable investment in both hard mechanization services. (warehouses, cold chain logistics, food packing, processing facilities) and soft (certification and Public sector, private sector, and academic traceability, farmer organization, industry codes institutions could collaborate on applied of practice) infrastructure. Recent Cambodian agricultural research and innovation related successes in implementing export strategies to increasing yields, managing animal disease, for specific commodities (high-quality rice and reducing post-harvest losses, and other critical pepper) illustrate the potential of such public- areas. To increase the availability of improved private collaboration. For some commodities, the seed, authorities could introduce more streamlined opportunity to process and add value locally may procedures for plant variety registration and increase as output expands, yet the general and strengthen procedures and capacities related to seed specific enabling environments for investments CHAPTER 6: Priority interventions to encourage sustainable development and seedling quality control. Public research centers in those sub-sectors need to be improved (e.g., could focus on supplying high-quality breeder cashew nuts)92. To support SME agribusiness seed levels, while technical and other support development and ensure inclusive agricultural could be provided to strengthen and expand seed growth, Cambodia can adapt institutional models multiplication and distribution activities by farmer that have worked elsewhere, including agribusiness groups and SMEs. A few possible ways to ensure incubation, farmer-enterprise productive alliances, collaboration in agriculture innovation would and contract farming systems. be: (i) national research councils to prioritize R&D needs, act as clearinghouses for information, and At the same time, Cambodia’s agriculture and promote transfer of technology programs; (ii) public- overall food system should play a stronger private partnerships to address specific innovation role in improving local nutritional outcomes, challenges (e.g., crop or value chain specific, post- ensuring that a diverse range of high-nutrient harvest technologies, use of agricultural wastes); foods is readily available and affordable and that (iii) an agribusiness incubator program; and (iv) a consumers are aware of the importance of these competitive grants program to finance collaborative in their diets. Cambodia’s food security strategy (public/private/academic) research initiatives. has long focused on increasing rice productivity and output. This remains important, although 92  Existing cashew orchards produce an estimated 60,000 to 91  This is recognized in the recent Agricultural Extension 100,000 tons of raw cashew nuts each year, making Cambodia Strategy released by the Ministry of Agriculture, Forestry and the tenth largest producer in the world. However, most of it is Fisheries. exported unprocessed to Vietnam (BDLink, 2017). 130 Policy Priorities the country now enjoys a large rice surplus at the 6.3 Pathway 2: Building human assets national level, and with consumption leveling off, to facilitate economic mobility and the bulk of any increase in the future will go toward exports.93 Dietary diversity and other food quality shared prosperity goals should be made explicit in national agricultural programs, strategies and medium-term targets. A second pathway is to build the assets of the poor Nutritional concerns and opportunities should and near-poor to facilitate their participation in be mainstreamed into programs of agricultural the growth process while also protecting their research (e.g., bio-fortification), extension (e.g., gains. Stronger human capital is crucial not only for including nutrition awareness modules in farmer enabling people to take up better job opportunities training, education on the production of non-staple in the non-farm sector but also for facilitating crops), land use programming in irrigation schemes, economic diversification and job creation. Cambodia public procurement (e.g., for school lunches and has the opportunity to improve the quality of learning civil servant canteens), and other spheres. In and increase educational attainment in order to Cambodia, the mainstreaming of rice fortification boost shared prosperity and increase the chances policies is challenging, due to the fact that large of the poor and economically vulnerable to attain mills only account for a small share of domestic economic security. Such jobs may not be aligned sales and a large proportion of the poor (and with the diversification and competitiveness strategy malnourished) either consume their own rice or but instead would provide economic opportunities buy from local small mills. In that sense, alternatives to the large share who will remain outside the global that could be promoted would include making value chains. Emerging priorities for achieving this fortification of commercialized vegetable oil or goal are a new focus on investing in the early years rice noodles mandatory (where there are likely to of children and increasing the transition to and be less dominant players), provide fortified kernels completion of high-quality secondary and tertiary that can be combined with unfortified rice at the education as well as TVET. This would also require point of use (e.g., in schools or public hospitals), improvements in public service delivery and could and investment in R&D and commercialization be complemented by strengthened and expanded efforts for bio-fortified rice varieties. Urbanization social protection systems not only to mitigate vulnerabilities but also to equalize access to high- CAMBODIA: Sustaining strong growth for the benefit of all brings new opportunities yet also major challenges for fostering improved diets. The state should play quality education and improve nutrition outcomes an active role in influencing both the supply and for the poor (Table 13). demand for healthy foods through regulations (e.g., healthy eating, street food hygiene), information Endowing people with skills by boosting campaigns (e.g., on labeling, food content, attainment and learning outcomes of advertising), support for peri-urban and community secondary and higher education vegetable production, and the maintenance or upgrading of marketplaces where lower-income Attainment of higher education is a prerequisite groups buy their food. for improving economic prospects, particularly for the land-poor whose primary asset is labor and for women. Attainment of secondary education significantly enhances one’s ability to get a non- farm wage job, and those who completed at least 93  For farmers growing rice predominantly for subsistence, secondary education are also more productive further productivity gains—especially through use of better in agriculture. Reducing gender gaps in higher seeds and improved soil management—will enhance household and local community food security. education attainment, particularly at the upper 131 132 CHAPTER 6: Priority interventions to encourage sustainable development Table 13. Pathway 2: policy options for building human assets Pathway Development Selected policy Selected policy Additional policy Additional policy Additional policy priority areas option 1 option 2 option 3 option 4 option 5 ii. Building 5. Endowing Effective Increase the Change the Get a baseline human assets people with implementation of autonomy of Higher incentives for measurement to facilitate skills by the Lower Secondary Education Institutions investing in more of existing TVET economic boosting School Effectiveness and improve education by the training programs mobility attainment Standards (LSSES) accreditation and poor and make and the skills gap, and shared and learning to improve learning quality assurance education more subsidize the private prosperity outcomes of outcomes mechanisms, affordable for the development of secondary and introduce incentives poor, including industry-specific higher education to prioritize STEM by improving the training centers subjects and support existing school research activities grants and national scholarship program 6. Investing in Ensure children are Expand access Use CCT as an Fund and the early years well-nourished, to opportunities instrument to implement the including by for early learning, potentially leverage National Action implementing the Fast stimulation, and child Health Equity Funds Plan for Rural Water Track Road Map for development through to cover identified and Sanitation, Improved Nutrition, non-institutional packages of nutrition expand piped water leveraging social and modalities, services (to women, service in rural behavior change including by training children) and areas by setting communication, and community preschool improve information up incentives for incentivizing the teachers on nutrition private operators consumption of early provided by health years services professionals 7. Shielding Reduce out-of-pocket Revise and strengthen Establish targeted Consolidate existing Reduce exposure households from expenditures related the ID Poor targeting conditional cash pension schemes to natural shocks to health shocks by system as the platform transfer programs to disasters through improving and further for expansion and shield the vulnerable risk-sensitive promoting Health consolidation of a population and planning and Equity Funds and by social protection also foster desirable design, enhancing expanding eligibility system for the poor behaviors such as risk assessment to other vulnerable and vulnerable school attendance or capacity, and population groups improved nutrition improving disaster practices preparedness capability and rapid fiscal response Source: World Bank staff analysis in consultation with stakeholders. Policy Priorities secondary level, is also crucial for reducing the gender ensuring that schools have financial autonomy. The disparities in earnings and job quality described LSSES would hold schools accountable for student earlier. Addressing both supply- and demand- learning through: (i) strengthening school-based side constraints to access to education is key. One management, which engages different stakeholders demand-side priority is to change the incentives at the community, district, and provincial levels who for investing in more education by the poor and monitor and support school functions; (ii) improving to make education more affordable for them so teaching quality, with a focus on providing high- that poor people do not have to choose between quality in-service teacher training, mentoring immediate survival and continuation of their systems at the school level, and strong technical children in school, which appears to be the case for and pedagogical support to teachers; (iii) providing the majority of children who drop out of secondary good teaching and learning materials based on the school for income reasons. Without addressing such needs of each school, which can be accomplished factors, access to education will remain unequal, through school grants; and (iv) providing conducive with the poor less likely to benefit. Sohensen et al. learning environments for students, which will (2016) show that secondary education spending in increase achievement and decrease dropouts. A Cambodia is not yet pro-poor, partly a reflection of pilot intervention for this policy option will be the availability of secondary schools in better-off implemented in select lower secondary schools areas but also a reflection of inequality in access through the Secondary Education Improvement to those schools between the poor and non-poor Project (2017-2022). In the coming years, the within the same areas. challenge will be to expand the implementation of LSSES from the pilot phase to nationwide To create an equitable secondary education implementation. system, the existing school grants and national scholarship program need to be improved. The quality and relevance of tertiary education Households continue to pay large sums of money can be improved through strengthened to send children to secondary school, which has accreditation and quality assurance mechanisms led to inequalities in school resource distribution and by more active use of public resources to between relatively rich and relatively poor school encourage STEM subjects. First, the RGC should CAMBODIA: Sustaining strong growth for the benefit of all areas and households. Ensuring equitable access provide academic and non-academic autonomy to quality secondary education for those from poor to public higher education institutions (HEIs). households—especially for females—requires policy Public HEIs should be able to set or change action. Policies should include: (i) prioritizing pro- curricula, raise adequate revenue, and develop poor school grants to narrow the school resource full-time, high-quality faculty without undergoing gap between schools and households in different external approval processes. Second, in return for socio-economic strata and (ii) revising the national increased autonomy at the institutional level, the scholarship program by changing the targeting management of public HEIs should be reformed methodology to be more equitable and increasing and held legally accountable through accreditation the amount and number of scholarships to maximize and quality assurance mechanisms. HEIs should its impact. be supported to make their management legally accountable in terms of governance, financial In order to strengthen the system of education management, and human resource management. service delivery, effective implementation Institutional accreditation should begin when of the Lower Secondary School Effectiveness the RGC approves revised Accreditation Council Standards (LSSES) is needed. This policy option is of Cambodia (ACC) quality standards, including enhanced by providing additional school grants and new guidelines and procedures. Internal Quality 133 Assurance capacity should also be developed associations or an SEZ) is an important first step.94 To at each HEI, closely supported and monitored ensure that the skills development strategy is aligned by the Department of Higher Education. Third, with market demands and that the TVET offered is public HEIs should provide the RGC with more and relevant for both students and entrepreneurs, private better information on the quality and relevance sector employers can play a stronger role in working of education provided to students, which the RGC with skills intermediaries such as associations and should make publicly available. This can be achieved training organizations. Specifically, the professional by expanding the pilot graduate tracking survey at associations and other intermediaries could serve the Royal University of Phnom Penh to other public as knowledge aggregators and implementers of HEIs. Data should track employment outcomes training programs and professional certifications of graduates, such as time to find job, type of job for different skill levels, based on the needs of the found, earnings, and career progression. Based on employer at the sector or firm level. In cases where international experience (e.g., the National Exam intermediaries are weak, provision of incentives for of Student Performance in Brazil), standardized in-house training of mid- to high-skilled workers assessments of tertiary student achievement (e.g., could be another potential avenue to explore. Brazil, see OECD, 2013) should also be introduced to Greater coordination among public entities is also ensure the competency of graduates. Fourth, given important as the RGC aims to strengthen its human that just 12.5 percent of registered students in HEIs resource capacity and develops the new National in Cambodia pursue higher education studies in TVET policy framework. science, technology, engineering, and mathematics (STEM) subjects, public resources could be used Training centers for industry-specific skills which to prioritize STEM fields by incentivizing both HEIs take into account the different labor market (through funding) and students (through grants situations facing men and women could play an and fellowships). Finally, it will be important to important role in equipping workers with the CHAPTER 6: Priority interventions to encourage sustainable development upgrade and expand research facilities, as well as necessary skills. The RGC and development partners increase the overall R&D expenditure envelope. could subsidize the development of industry-specific training centers to ensure that training is aligned Better matching the supply of skills training with employers’ needs and also with industry and with employer demand, including strengthening growth trends, but with a sustainable model of cost the role of intermediaries, is also priority for sharing for the delivery of training with employers improving education more generally. While and workers/students. These training centers should improving educational attainment will help be designed and operated with an awareness of develop better-educated students in 15 years’ the different situation facing men and women in time, foreign and domestic investors currently the labor market and should cover the spectrum struggling to compete and expand exports will of industries, including female-dominated sectors need skilled labor—particularly mid- and high- such as garments and tourism. The training format skilled workers—over the next decade. As labor should also address specific issues of transport and costs rise, labor productivity must increase through the development of workforce skills that are aligned 94  The 2013 Enterprise Survey reports skills deficits across with Cambodia’s diversified industrial strategy. Given the skills spectrum, with the most serious shortages in the discrepancies between formal skills statistics and managerial skills, despite the fact that business studies are the most demanded in tertiary education. This paradox may relate the perceptions of businesses, getting a baseline to quality issues. A range of skills are also reported missing, measurement to assess the additional remediation ranging from standard numeracy, literacy, and vocational skills to the less-recognized work attitude (low-skilled) to decision- and training programs needed at the level of private making (semi-skilled) to analytical (high-skilled), each with sector operators and intermediaries (such as business serious implications for productivity and absorptive capacity. 134 Policy Priorities care and the stark occupational segregation, both There has been limited progress on the series of high- in terms of sectors and in terms of levels within an impact nutrition interventions in Cambodia’s strategy industry. thus far in terms of operationalizing the FTRM, achieving high coverage, and improving the quality Investing in the early years of these services. Authorities can leverage its existing platforms, such as HEFs and Service Delivery Grants Investing in the early years would help prevent (SDGs), to help improve health worker motivation, constraints on children’s development. This knowledge, and competencies to deliver nutrition requires getting children into school early and hence services. SDGs can serve to measure and reward health at the prime time for brain development, providing worker performance on nutrition in institutional them with an adequate learning environment, and and outreach settings, while HEFs provide a results- ensuring that they are well-nourished. The high based payment mechanism for institutional services degree of women’s labor force participation and in paying health facilities for delivery of pre-defined migration are critical for household income—and ‘packages’ of nutrition services. the country’s growth more generally—but also pose challenges to reducing malnutrition and stunting, as Financing could be scaled up for social and discussed earlier. Improvements in the accessibility behavior change communication aimed at and quality of childcare are thus important for harmonizing nutrition-relevant messages across tackling malnutrition as well as lowering the trade- sectors. While Cambodia has made progress in offs facing young women between childcare improving rates of early and exclusive breastfeeding, and work. Evidence-based nutrition-specific there are barriers to improving nutrition in the early interventions targeting vulnerable children could years, such as the persistence of traditional maternal include fortification, supplementation, and behavior care and complementary feeding practices, the change communication, and nutrition-sensitive rapid rise of formula feeding, and practices related interventions could support improvements in to the underlying drivers of malnutrition such as households’ water supply and sanitation. This hygiene, sanitation, and responsive parenting and would ideally be combined with the promotion of caregiving. Relevant ministries (e.g., Health; Rural early childhood education and other multi-sector Development; Education, Youth and Sports) have CAMBODIA: Sustaining strong growth for the benefit of all initiatives. prepared the necessary strategies and action plans to promote the provision of social and behavior Results-based mechanisms could be used to change communication,96 but these remain almost stimulate the availability and quality of the exclusively delivered through external financing package of nutrition services outlined in the Fast with very limited availability of domestic resources. Track Road Map for Improving Nutrition (FTRM).95 Achieving improved, sustainable nutrition results will depend on the state taking over to finance the 95  The Fast Track Road Map for Improving Nutrition (2014- scaling up of strategic actions through mass media, 2020) outlines five packages of nutrition interventions community, and inter-personal mechanisms. to be delivered at scale: (i) Nutrition counselling during antenatal care; (ii) micronutrient supplementation and deworming for mothers and newborns; (iii) treatment of 96  FTRM prioritizes a national campaign for infant and severely wasted children; (iv) micronutrient supplementation young child feeding. The Ministry of Health is currently for prevention and treatment strategies; and (v) behavior updating the Infant and Young Child Feeding Strategy to change communication focused on the 1,000 day window of include breastfeeding. The Ministry of Rural Development has opportunity. Three additional activities are proposed to enable prepared the National Strategic Plan for Rural Water Supply the scaling up of these packages: (vi) remove financial and and Sanitation 2014-25 which includes behavior change human resources barriers to scale up efficient interventions; communication as a key strategy, supported by National (vii) leverage support through other ministries and initiatives; Guidelines for Behavior Change Communication for Rural and (viii) improve nutrition data in existing information systems. Sanitation and Hygiene and Cambodia. 135 Demand-side incentives can be leveraged to implementation in rural areas. This expansion stimulate behavior change and consumption of could be done by training community preschool essential early years services. Interventions such teachers; providing community preschool facilities as early years-targeted cash transfers, transportation and teaching equipment; providing training to allowances, and community-level incentives (such as mothers on nutrition, caring during pregnancy, and to commune councils/commune social funds) can caring of small children from 0 to 3 years old; and reduce barriers to access and complement supply- improving the data system for sub-sector planning side improvements in the availability and quality and monitoring. of services as well as provision of information. The new Social Protection Framework for Cambodia To improve the provision of water and sanitation includes a cash transfer or stipend for poor pregnant services, measures could include establishment women and children, although financing for the of a well-funded program for implementation activities outlined in the framework has not yet of the National Action Plan for Rural Water and been identified. In addition to reducing poverty and Sanitation (NAP), expansion of piped water vulnerability, safety nets such as CCTs can have an service in rural areas, and capacity building for impact on nutrition if interventions are designed water operators to improve service performance with that objective and target group in mind. and efficiency. Emerging evidence suggests that Evidence from a CCT pilot in Cambodia points to access to water and sanitation is an important the ability of such programs to incentivize greater factor for improving child nutrition. As such, jointly use of public health services, as well as HEFs, which providing water and sanitation services in the same continue to be underutilized by large numbers areas, i.e. geographical convergence where other of eligible beneficiaries. Under HEFs, MOH has nutrition-specific and nutrition-sensitive services provided transport allowances for identified poor are provided, will optimize nutrition outcomes. beneficiaries seeking services at referral hospitals, Although the Ministry of Rural Development has CHAPTER 6: Priority interventions to encourage sustainable development removing access barriers and improving utilization prepared a five-year NAP, the Plan has not been of hospital services. Extending the HEF transport funded, so implementation largely depends on allowance benefit to cover the receipt of identified external partners. Setting up a program along packages of nutrition services, at either the health with financing for implementing NAP targeting of center or referral hospital level, would help remove nutritionally vulnerable areas would bring more both physical and economic access barriers to tangible results on child development. The Ministry service utilization. Likewise, in the medium term, of Industry and Handicraft has committed to key opportunities to utilize results-based incentives for reforms in public water utilities and put a regulatory communes to promote the achievement of early framework in place to support and attract the private years results could be explored. sector to the water sector. Bringing more investment to public utilities and setting up financial incentives Non-institutional modalities could be used to for private operators to expand network areas would expand access to opportunities for early learning help expand access to the piped system in rural areas. and stimulation. The Ministry of Education, Youth and Sports (MoEYS) established minimum standards Protecting households from shocks for the Home Based Care/Parental Education Program and Community Preschool, and MoEYS is Measures aimed at mitigating shocks and implementing the standards under the Secondary building resilience would help shield household Education Sector Support Project funded by the income and prevent households from falling Global Partnership for Education. The challenge into poverty. Over time, the share of near-poor in the coming years is to expand the program’s and economically vulnerable households has risen 136 Policy Priorities significantly even as extreme poverty has declined, further improvements in health service delivery, with limited mobility into higher economic status such as building provider competencies and supply- where households are secure. As discussed earlier, side readiness for quality antenatal, emergency catastrophic health expenditures are a major obstetric, and neonatal care, in order to tackle concern—households with more people ages 65 maternal mortality. and above, especially female-headed ones, are much more likely to be at the bottom of the socioeconomic Strengthening of the ID Poor targeting system ladder in Cambodia, and the country has the highest underlies any expansion of safety net coverage number of people exposed to flooding in a year. for the vulnerable. The ID Poor tool for rural areas, To help reduce vulnerabilities, some policy options which is now several years old, should undergo include significantly reducing OOP expenditures a careful revision to ensure that criteria remain related to health, mitigating impacts of weather relevant, that community selection mechanisms shocks, and fully developing a pension system to are designed to avoid elite capture to the extent minimize old-age vulnerability and mitigate the loss possible, and that grievance redress mechanisms of labor income, particularly among female-headed are built into the system, with the potential for households and the population dependent on programs to supplement information to the ID Poor non-wage income. In addition, exposure to natural in addition to the surveys undertaken every three disasters could be reduced through risk-sensitive years. The ID Poor process would need to allow for planning and design, while further efforts could aim “post-identification” of poor families, with a carefully at enhancing risk assessment capacity (including designed mechanism that could be adopted by modernization of the country’s hydromet systems) any of the numerous programs on the ground and improving disaster preparedness capability such as the HEFs, which are currently using their and rapid fiscal response. Finally, the establishment own identification mechanisms but have no ability of targeted CCT programs could both shield the to communicate those findings to the ID Poor. In vulnerable population and foster some desirable the future, a strengthened ID Poor system, which behaviors such as school attendance or feeding includes not only a list and ranking of the poor but habits to fight stunting. also of the non-poor and is linked to a civil registry system, could potentially be used as the basis for CAMBODIA: Sustaining strong growth for the benefit of all Stratified expansion of HEFs to cover more all public sector-led safety net programs including vulnerable groups—such as the disabled, social pensions and other forms of social insurance, elderly, children, and eventually near-poor CCTs, and disaster response. informal sector workers—will improve financial protection against catastrophic health A CCT program would provide a valuable safety expenditures in the country. Over the last decade, net for poor families, softening the impact HEFs have been the main mechanism for improved of shocks, improving health and nutrition financial protection for the poorest quintile of outcomes through knowledge and incentives, Cambodia’s population, with major gains in access, and leveraging supply-side investments such as utilization, and impoverishment indicators. As a next the HEFs. Several vulnerable groups lack access to step, stratified expansion of the system, wherein a safety nets. For example, families with small children deeper benefit package is made available for the are not specifically targeted by any existing safety poor while some basic protection is also extended net program, but they remain one of Cambodia’s to other vulnerable groups, would contribute to vulnerable groups as evidenced by high levels of progress toward universal health coverage and stunting, particularly in poor, rural areas. In addition, reduction of risk for impoverishing health shocks. although most safety net programs are focused on In addition, HEFs could be leveraged to introduce the elderly and disabled, there is scant evidence 137 that they actually reach their intended beneficiaries. registry and targeting system and ideally based on A CCT could provide a much-needed safety net for the ID Poor targeting system. the poor and could be used as a delivery vehicle to consolidate a number of schemes (e.g., public A comprehensive disaster risk finance strategy or pensions for the elderly poor, support to the disabled, policy is needed to help systematically manage support to poor households with pregnant women the financial impact of natural disasters and and/or small children). A CCT also has the potential improve capacity for rapid financing responses to be expanded to include other vulnerable groups following disasters. This would help secure like the near-poor, particularly in times of crisis or adequate funding for the Cambodia Food Reserves in response to shocks where this group is more System (already established by authorities) and the apt to fall back into poverty. The ID Poor targeting budget for immediate response to disasters instead system should be the main tool for identification of relying heavily on international donor assistance of beneficiaries, but reforms to the system to make for response, relief, and recovery. Tapping into a it more adaptive and responsive (i.e. to potentially strengthened ID Poor targeting system would then include new entrants if they are identified as poor by facilitate the delivery of relief support to those who programs such as HEFs or the CCT) are necessary. are most vulnerable and affected by catastrophic events. In preparation for aging, pension reform is needed, starting with harmonization of the 6.4 Pathway 3: Ensuring a sustainable different ongoing schemes with the aim of growth pattern by investing in achieving full portability. Cambodia faces two key challenges in its effort to establish a public natural capital, climate resilience, and pension system: (i) existing programs only cover sustainable urban development those in the public service and uniformed forces CHAPTER 6: Priority interventions to encourage sustainable development and are highly fragmented between government A third pathway is to ensure a sustainable growth agencies and departments, with weak enforcement pattern by investing in Cambodia’s natural capital of contribution requirements, and (ii) the National and sustainable urban development, while Social Security Scheme being considered is designed strengthening climate resilience. As discussed in a way that will be appropriate for only a fraction of earlier, improving the sustainable management of Cambodians. A strategy for assessment of the public natural resources will help maintain future economic pension system could entail the following: (i) taking growth and poverty reduction through both stock of all public service pension arrangements and products and ecosystem services that sustain other developing a roadmap toward harmonization; (ii) economic activities. While urban development has evaluating the labor market, country demographics, contributed substantially to growth and poverty and poverty prevalence against the draft National reduction, Cambodia’s natural resource base has Social Security Scheme, with the objective of been significantly degraded over the last two establishing an umbrella platform for social security decades due to unsustainable economic activities provisions that accommodate the varied conditions and management practices. Rapid and poorly of workers in the formal and informal sectors; and (iii) planned urban development has contributed to evaluating the rationale and fiscal space for a special increased water and air pollution and heightened assistance scheme for the poor elderly and building cities’ vulnerability to the impacts of climate change. on the registry and targeting mechanisms being Compounding these issues are expected changes considered for the broader population to support in the water regime in Cambodia from the Mekong it. Targeted cash transfers to the elderly living in River, with impacts from upstream hydropower poor households would be needed, building upon a development and increased water use for agriculture 138 Policy Priorities and domestic needs. Authorities therefore face the early stages of implementation and face a number several critical decisions on the tradeoffs in of legal, institutional, technological, financial, human supporting its food, energy, and water needs in resources, and information challenges which now both rural and urban areas while also conserving its need to be addressed at a larger scale. In particular, natural systems. the development of targeted public expenditure programs would help address gaps in financing the Given the interlinked nature of natural ecosystems RGC’s national strategies, action plans, and practices and man-made urban environments, addressing related to natural capital and environmental services these challenges requires spatially integrated management, climate change, and green growth, and approaches to natural resources management to increase investment and capacity support for local and urban planning. For natural resources, this authorities for implementation. To reduce the high means taking into account the challenges related costs of unsustainable economic activities, it is also to modernizing agriculture, improving fisheries, recommended to develop a comprehensive process expanding and sustaining tourism, and developing for information management and institutionalize the hydropower within a specified area or landscape, conduct of EIAs and SEAs for all public and private in coordination with investing in managing and projects that are likely to impact the environment restoring degraded forests and aquatic ecosystems and livelihoods. and strengthening resilience to climate change and natural disasters. For urban planning, this means Specific to the forestry sector, further developing a long-term strategy for implementing institutional and investment support is needed reforms across various urban sectors, including water, to combat deforestation and move toward sanitation, transport, and disaster risk management sustainability. Cambodia has developed a National in a specified city, covering its central urban areas, Forest Programme (NFP), National Protected Area urban poor settlements, and peri-urban areas. By Strategic Management Plan (NPASMP), and National adopting a comprehensive rather than piecemeal REDD+ Strategy and recently announced that it approach, Cambodia will substantially strengthen its will apply a conservation corridor approach to capacity to achieve its growth and poverty reduction the management of its forest landscapes. For the objectives in the Rectangular Strategy along with its conservation corridors, support will be needed to CAMBODIA: Sustaining strong growth for the benefit of all climate adaptation and mitigation commitments in its develop a strategic plan and policy framework for Nationally Determined Contribution (NDC), (Table 14). their management, strengthen co-management with communities and across different sectors, Maintaining and developing natural capital, develop a zoning plan for land use and tenure within while strengthening climate resilience the corridors, implement sustainable livelihoods, improve governance and law enforcement, and Increased support for implementing and scaling create a long-term financing mechanism for forest up Cambodia’s existing national-level reforms landscape management. The establishment of and programs on natural resources and climate partnerships with industry champions would change would go a long way toward preserving encourage the private sector to adopt more the country’s natural capital. Cambodia has taken sustainable forms of forest use in their operations. several steps in this regard, including submitting its Meanwhile, in support of the NFP and NPASMP, efforts NDC to the UNFCCC and ratifying the Paris Agreement, should focus on measures that improve sustainable along with adopting a number of national laws and management and conservation in protected areas policies such as the National Strategic Plan on Green and forests. Particular attention should be paid to Growth and National Action Plan for Disaster Risk those located in upstream watersheds critical for Reduction. However, some of these efforts are still in controlling erosion and sedimentation that have 139 140 CHAPTER 6: Priority interventions to encourage sustainable development Table 14. Pathway 3: policy options for investing in natural capital, climate resilience, and sustainable urban development Pathway Development Selected policy Selected policy Additional policy Additional policy Additional policy priority areas option 1 option 2 option 3 option 4 option 5 iii. Ensuring 8. Maintaining Integrated approach Support NFP, Address gaps Improve Conduct EIAs and a sustainable and developing to natural resource NPASMP, and REDD+ in financing in implementation SEAs for all public growth pattern natural resources management, implementation to approved national- of Integrated and private projects by investing through a considering challenges improve sustainable level plans related Water Resources likely to have in natural spatially related to modernizing management and to natural capital Management impacts on the capital, climate integrated agriculture, improving conservation in and environmental (IWRM) through environment and resilience approach, while fisheries, developing protected areas and services further support to livelihoods and urban strengthening hydropower, restoring forests management, information systems development climate degraded forests, climate change, and and capacity resilience managing water green growth building resources, and strengthening climate resilience 9. Promoting Implement an Develop a centralized Implement solid Reduce congestion Upgrade poor competitive, integrated urban sanitation network and liquid waste and pollution urban settlements sustainable, planning agenda along with support management through through improved and inclusive that brings together for decentralized and solutions, including investments service provision cities through land use and disaster on-site sanitation developing in transport (drainage, trash integrated urban resilience plans solutions sanitary landfills infrastructure, collection, and planning with investments and exploring services, and land water and electricity in transportation the feasibility of use planning connections), networks and water constructing waste- provision of and sanitation to-energy plants affordable housing infrastructure Source: World Bank staff analysis in consultation with stakeholders. Policy Priorities negative impacts on downstream users, agriculture, initiatives. Specific activities in the Mekong could fisheries, and hydropower as well as weaken resilience include further investments in small-scale irrigation to flooding. Proposed policy options include facilities, construction of hydraulic structures  with expanding alternative livelihood opportunities effective fisheries impact mitigation  features  in from non-timber forest products and eco-tourism, appropriate areas for flood control and stream developing sustainably managed plantations for flow management, and improvements in upstream fuelwood and timber, bringing natural forests industrial pollution and domestic sanitation under certified sustainable forest management, management.  In particular, strategic planning carrying out environmental education activities for  hydropower  at the lower Mekong basin to raise awareness on the benefits of conservation scale  should be undertaken.  Addressing water and sustainable management, and setting up resources in this integrated manner, focusing on payment for ecosystem services (PES) schemes to the country’s most critical watersheds, would not enable forest communities to be compensated for only increase the availability of clean drinking water erosion prevention provided by forests. It will also but also improve food security, increase incomes be important to improve land tenure and land use generated from fishing and agriculture communities, rights for all rural sectors (including forestry) to and contribute to the country’s economic growth. support local and foreign private investment and ensure that villagers and small producers do not lose Moreover, given the interlinked nature of their livelihoods base. these terrestrial and aquatic landscapes, a spatially integrated approach to natural The management of Cambodia’s water resources resource management is needed to ensure the and highly productive fisheries also requires effectiveness and long-term sustainability of stronger implementation of its existing plans, sectoral initiatives in forest and water resources, policies, and practices for the Mekong River while also strengthening climate resilience. and Tonle Sap ecosystems.  As a first step, it is Although a limited focus on just one sector or recommended that Cambodia  continue to  improve resource such as forests or fisheries may achieve the implementation of Integrated Water Resources positive outcomes, it also risks causing negative Management (IWRM),  particularly through further externalities in other areas or inequitable outcomes CAMBODIA: Sustaining strong growth for the benefit of all support for its water information systems and local across various stakeholders due to conflicting government capacity building, as part of the ongoing interests. Spatially integrated planning would better decentralization process. Given the complexity of identify compromises among conflicting interests addressing aquatic resource challenges, a range and resource use plans developed by various of sectors should be engaged  in IWRM, including local authorities. Selected interventions should agriculture, industry, urban development, energy, combine both public and private sector approaches, environment and governance.  For instance, in including regulatory reform and investments in managing the Tonle Sap, priority measures could infrastructure, along with market development include  improving sustainable forest management and community-level capacity building activities. in upstream watersheds,  reducing agriculture For instance, priority interventions could include pesticides  runoff,  and  supporting the development strengthening the policy basis for secure tenure in of  alternative livelihoods such as aquaculture and community fishing zones, implementing a cross- vegetable growing. Likewise, it is recommended that sectoral watershed investment planning process, Cambodia develop sub-basin plans and a “Mekong developing payment for ecosystem services (PES) Delta Plan” that takes into account trade-offs between schemes for providers of certain services such as soil sectors, climate and development uncertainties, and erosion prevention, and promoting the adoption of the cross-boundary impacts of national development development and resource management practices 141 that strengthen livelihoods’ climate resilience. The important for urban development and management. particular interventions selected may be targeted In addition, stronger institutions and innovative to specific critical landscapes, such as the Mekong financing mechanisms such as public-private Delta and Cardamom Mountains together with partnerships are needed, as most municipalities lack the Tonle Sap. In order to effectively manage these sufficient local revenues and budgets to strengthen landscapes, it will also be critical to strengthen their institutional capacity or to make adequate co-management, reduce fragmentation and set investments in infrastructure. Currently, much of common targets across  different sectors among the financing available to municipalities are from both  national  and  local governments,  in support national government grants, and since the collection of the ongoing decentralization efforts and of user fees and taxes are often limited, municipalities implementation of the policy on  conservation have few local revenue sources. Addressing these corridors. In doing so, spatially integrated natural information and resource constraints will enable resources management would not only protect the more effective and integrated urban planning across area’s terrestrial and aquatic resources but also help the country, which is critical since decisions and ensure that downstream communities continue to investments made today will lock in the city form for benefit from the larger watershed’s environmental generations to come. services, that people’s livelihoods are safeguarded from the negative impacts of new economic Priority areas for investment within these activities, climate change and natural disasters, integrated plans include urban sanitation and and that the incomes of fishing, farming, and forest transport, along with increased attention to the communities are sustained, if not increased. upgrading of urban poor settlements. The entire sanitation system is in need of significant investment Promoting competitive, sustainable, and and institutional support in all of Cambodia’s cities. inclusive cities through integrated urban Although Sihanoukville, Siem Reap, and Battambang CHAPTER 6: Priority interventions to encourage sustainable development planning have the beginnings of a sewerage network including wastewater treatment plants, only a small share of the The development of competitive, sustainable, total urban area is connected, and the infrastructure and inclusive cities requires the implementation is in disrepair due to lack of sufficient operations of an integrated urban planning agenda that and maintenance. Current investments, averaging brings together land use and disaster resilience around USD 6 million annually, fall far short of what plans with investments in transportation is needed. For instance, to connect half of the urban networks and infrastructure. To be competitive, population to wastewater treatment facilities by cities need reliable transport infrastructure to enable 2025, USD 86.7 million per year in capital expenditure firms to access local, regional, and global markets. would be required, in addition to an estimated USD Equally important are investments in sustainable and 9.5 million annually for O&M expenditures (WSP, reliable electricity, water, sanitation, and solid waste 2015). Although increased government finance services that are inclusive of urban poor settlements with support from development partners will be and peri-urban areas. To date, only Phnom Penh and important, it will also be critical to improve cost Battambang have developed detailed urban master recovery through improved collection of user plans, with limited progress in their enforcement tariffs and fees. In parallel with the development and implementation. In parallel, master plans for of a centralized sanitation system, decentralized urban transport, solid waste management, drainage and on-site solutions such as community-managed and sewage, and water supply plans have been Decentralized Wastewater Treatment Systems developed for Phnom Penh. Strengthening the (DEWATS) could be pursued to increase access to coordination and implementation of these plans is sanitation, particularly in peri-urban areas. Finally, 142 Policy Priorities solid waste management is also a growing urban particularly rundown could be targeted for multi- sanitation challenge in need of additional support. sector interventions to revitalize activity. Together, Potential solutions include developing sanitary these changes could help improve the living landfills and exploring the feasibility of constructing conditions of the urban poor dramatically. waste-to-energy plants. Moreoever, considering industry’s large and growing contribution to water 6.5 Cross-cutting: Public pollution, it will be important to go beyond end-of- administration and public financial pipe pollution treatment to adopt cleaner and more energy-efficient technologies. management reforms for improved service delivery With regard to transportation, Cambodia’s cities are facing increased congestion due to a All reform priorities identified in the SCD combination of increased urban populations, require significant capacity for public service increased motor vehicle use, and poor zoning delivery and implementation, which would of road networks. In support of existing policies depend on complementary decentralization, and plans such as the Phnom Penh Master Plan public financial management, and public and the National Strategic Plan for Green Growth, administration reforms, including improved municipalities across the country could implement performance oversight and citizen feedback a number of measures to help reduce congestion mechanisms. As a lower middle-income and pollution. For example, priority measures could economy, Cambodia is considering the include improving and increasing the scale of public rebalancing of responsibilities at the national transportation modes such as buses, introducing new and subnational levels. Cambodia has started modes of public transport such as commuter trains to pursue decentralization and deconcentration along with incentives to promote their use, adopting (D&D) reforms, which aim to improve public vehicle emissions standards and incentivizing the service delivery by increasing the responsibilities use of low-emissions vehicles, introducing parking and decisionmaking autonomy of frontline regulations and zoning, constructing ring roads for service providers, both in the social (education, through-traffic, and designating pedestrian zones. health) and economic sectors (e.g., extension CAMBODIA: Sustaining strong growth for the benefit of all Land use planning is another useful approach that for irrigation, infrastructure maintenance). could help reduce traffic congestion in urban areas. The rebalancing of responsibilities requires a By influencing the spatial structure of cities, land corresponding reallocation of funding and human use planning can reduce the number of kilometers resources across different levels of government. driven and make walking more attractive. The continuation of ongoing public financial management reform, together with overarching Finally, upgrading of poor settlements and public administration reform, would thus be key provision of affordable housing are necessary to improving capacity for public service delivery. to accommodate the needs of a population that In addition, a change management approach, suffers from poor public service provision and together with staff monitoring and enhanced insecure land rights. Priority investments and citizen feedback mechanisms, would help increase reforms should focus on upgrading of urban poor value for money in the use of public funding, settlements—including drainage systems, trash limit the scope for patronage and corruption, and collection, and water and electricity connections— improve accountability and oversight. as well as the implementation of a transparent and coordinated land registration and titling process. In Decentralization of public services to the addition, neighborhoods that are lagging behind or subnational levels could be fostered by credible 143 financing, capacity building, social accountability, Further strengthening of public financial and line ministry support. Considerable progress management, coupled with an overhaul of the has been made in implementing D&D reforms, but public administration, would help improve much of this remains unfinished business. Most public service delivery significantly. While functions that have been delegated to the district/ Cambodia has been successful in expanding municipal level have yet to be fully transferred. the provision of public services over the past The transferred responsibilities would need to two decades, quality remains a concern in be accompanied by additional funds, training, some cases. For example, primary enrollment policy guidance, and support from line ministries. rates have improved substantially, but as the Development investments at the subnational level reading assessments show, the quality of primary are limited by escalating administrative costs, so education remains mediocre. Underlying the space for meaningful development investment is quality, adequacy, and efficiency of public needed, including enhanced own source revenue services is the ability of government to generate and expanded use of the newly created Sub-national sufficient revenue for important public spending Investment Fund (SNIF), a fiscal transfer mechanism and investment requirements, spend the available to provide a conditional grant earmarked for local resources efficiently and with accountability, and infrastructure and investment projects at the maintain a well-functioning public administration district level. Districts need extensive capacity staffed by competent civil servants, with building support to provide quality assurance for adequate pay and performance management decentralized services and to plan and implement and empowerment to handle funds for specific investments that respond to priority local needs. services with integrity. Finally, decentralized service delivery should be met with the expanded implementation of the Social Value for money in the use of public funds could Accountability Framework (I-SAF) to eventually cover be increased by completing implementation CHAPTER 6: Priority interventions to encourage sustainable development all districts in the country. I-SAF aims at enhancing of the FMIS and program budgeting reforms. citizen’s access to information on budget usage and PFM reform under the PFMRP can be deepened performance of councils and other service providers further, with a focus on strengthening public by promoting the participation  of citizens in both expenditure/resource management through the monitoring and civic engagement. expansion of FMIS functionality to line ministries Table 15. Cross-cutting: policy options to improve public service delivery Public administration and public financial management reforms for improved service delivery Selected policy option 1 Modernize human resource information management tools to introduce performance-based management Selected policy option 2 Strengthen citizens’ voice on the quality of public services delivered by improving users’ feedback mechanisms (e.g., expansion of I-SAF) Additional policy option 3 Introduce merit-based performance management for directors/managers of essential public services Additional policy option 4 Continue implementation of the FMIS and program budgeting reforms Additional policy option 5 Increase funding to improve the capacity of the statistical system to inform policymaking Source: World Bank staff analysis in consultation with stakeholders. 144 Policy Priorities and streamlining of required workflows/processes central ministries. A modernized HR information to facilitate budget execution and to support management tool would support improved program budget implementation and reporting performance management and the development of for improved linkages between budget and a professional, performance-oriented workforce by policy. While program budget implementation developing and/or automating a series of functions progressed rapidly in terms of the number of (e.g., personal information, attendance, workforce ministries presenting budgets in the program management, payroll, career management, budget format, substantive improvements in the pension calculation, performance appraisal). This linkage between policy and budget are constrained tool would also help ensure adequate deployment by the highly centralized cash management and monitoring of human resources at the central processes/workflows, making it difficult to provide level to provide quality provision of services at the high-quality and timely services to citizens. This local level. is coupled with inadequate discretion for budget managers to utilize the budgets at their disposal, Finally, a change management approach would given rigidities to reallocate funding across need to be introduced, along with stronger programs (mainly decided at the central level). The citizens’ voice on the quality of public services expansion of FMIS functionality to line ministries, delivered by frontline service providers. The together with the needed streamlining of existing capability of government agencies to deliver processes, and refinement of program budgeting public services could be enhanced through: (i) a at the line ministry level, offers opportunities for comprehensive and well-sequenced public service improved funds flow and greater accountability improvement program in support of the National that can have a positive impact on the delivery of Program for Public Administrative Reform (NPAR), essential public services. with a focus on supporting broad-based reform activities that are critical to improving service Modernization of human resource (HR) delivery (including merit-based performance information management tools would support management for directors/managers of essential the management of staff performance and public services); (ii) increasing the autonomy in overall HR management functions of the public the management of essential services by frontline CAMBODIA: Sustaining strong growth for the benefit of all sector. Improving HR information management service providers for improved downward means improving HR data quality (to include unique accountability, so citizens can directly hold service identification of civil servants), standards, and providers accountable; and (iii) introducing service human resource information systems to facilitate users’ feedback mechanisms and monitoring and better workforce planning and management of evaluation of public services (e.g., through a unified people, payroll management, organizations, and call center, a gateway to public services, as well reforms. Cambodia currently has highly fragmented as embedded in e-services). This reform program systems for managing human resource information, could help improve the implementation of other with a different set of technologies used for civil measures and programs, and the enhancement servants, contract staff, and payroll and without of public services in terms of access, quantity, and analytical report generation functionality, adequate quality. It would also be a way to pair recent salary system security, and unique identification of civil increases with enhanced performance, to limit servants, making it difficult to manage human the scope for patronage and informal fees, and to resources in the increasingly decentralized provide non-monetary incentives, which form an environment under the D&D reform effort. important part of the incentive structure for civil Duplicate efforts and labor-intensive data entries servants. happen at the Ministry of Civil Services and other 145 6.6 Data constraints and identified and business surveys would help to generate richer knowledge gaps and more updated information for decision-making. Third, a user satisfaction survey would help the National Institute for Statistics (NIS) collect feedback Cambodia’s national statistical system on the performance of its website and improve produces data on a number of dimensions, but offered services. Improvements to the NIS website coordinated efforts by different stakeholders would ideally include an Advance Release Calendar and development partners are needed to ensure to inform users on the scheduled releases of key data, quality and consistency, increase frequency, as well as a data portal to enable users to download and introduce a culture of public and open time series data or browse metadata of Cambodia’s data. Cambodia has relatively recent agriculture, key socio-economic indicators. business, and population censuses and frequent socioeconomic surveys, as well as demographic Limited funding and capacity hampers the health surveys. However, the only labor force survey production of relevant and good-quality data in a dates back to 2007, and no enterprise or education timely manner and often discourages institutions quality surveys are available. While a number of from sharing collected data publicly. This leads to macroeconomic indicators (e.g., inflation, balance informal networks playing a role in data access, which of payments) are publicly available with certain limits the scope for rigorous research on relevant frequency, national accounts and employment data development matters. In addition, the sustainability are only available on an annual basis and are often of data collection programs and capacity building delayed in publishing. Data on central government introduced by donors is often hampered by operations is released more than six months after personnel rotation and lack of funding. For example, the end of the fiscal year and has been based on following technical assistance from the IMF, the fragmented and often inconsistent records across NIS started to produce quarterly national accounts, CHAPTER 6: Priority interventions to encourage sustainable development departments—in this sense, the implementation but this effort was soon discontinued. Adequately of a new FMIS constitutes an opportunity to funding the NIS and revamping the organizational improve data quality. Overall, Cambodia does well structure to enable it to fully accomplish its mandate in terms of availability of censuses and surveys but and become the central institution for statistical lags behind in terms of the methodology used, production, quality control, and data sharing which in most cases is not up to par with the latest in Cambodia are desirable, especially now that international standards, and in terms of openness the country has become a lower middle-income and dissemination practices (Figure 53). economy and needs more sophisticated and well- informed policymaking. The identified weaknesses in statistical capacity indicators call for a series of actions aimed at This SCD has been informed by country sources, improving the capacity of the statistical system complemented with international sources and to inform an evidence-based decision making secondary information when required, but process, as well as to monitor and evaluate some data gaps exist. The main country sources progress in development in the coming years. of information for this SCD were the national First, by improving its standards and subscribing accounts, the Cambodia Socioeconomic Survey, to the Special Data Dissemination Standard of the and other macroeconomic indicators. In terms of IMF, Cambodia could significantly strengthen its exports, Cambodia has reliable customs data thanks methodology and procedures for collecting and to the progressive introduction of the ASYCUDA producing data. Second, improving the frequency system starting in 2008. The analysis also drew of agriculture, labor force, health and demographic, from mirror data analysis to double check and try 146 Policy Priorities Figure 53. Cambodia lags behind other peers in data standards and openness Statistical Capacity Indicator 120 100 80 60 40 20 0 Methodology Censuses Dissemination Availability Overall & Standards & Surveys Practices & Openness of Key Indicators Score Bangladesh Guatemala Cambodia Nicaragua Philippines Vietnam Source: Development Economics Data Group, the World Bank Group. to capture informal exports, as well. World Bank transformation is expected to accelerate. Group Enterprise Surveys were used to describe • Analyzing environmental and social externalities, firm concerns and dynamics. A series of identified as well as contingent liabilities from PPPs in the knowledge gaps signal potential directions for future energy generation sector, to help understand research, as they go beyond the scope of this SCD: the sustainability of current policies. Assessing to what extent relatively high electricity costs • Conducting additional work on skills from relate to the current energy mix, and identifying the point of view of the firm to gain a better renewable low-cost alternatives for the future. understanding of the extent to which the lack of • Elaborating an updated Investment Climate skill supply is inhibiting investments in process Assessment aimed at shedding further light on CAMBODIA: Sustaining strong growth for the benefit of all and technology improvements (or vice versa). implementable reforms that can help improve The analysis could also look at how specifically the business environment and reduce the the private sector is dealing with the lack of costs for firm establishment and operation in higher skills, which demand-led models can Cambodia. be considered for scaling up, and what specific • Conducting an assessment of Information and dimensions of SME capabilities are the least Telecommunication Technologies and platforms developed (e.g., production management, sales in Cambodia. and marketing, personnel management). • Assessing the main constraints to tourism • Conducting more regular labor force surveys, development and identifying sustainability especially given the large share of wage linkages, potential for eco-tourism and economic employment (on which labor force surveys are assessment of areas for development, and scope well-equipped to capture information). for institutional reform. • Analyzing migration trends and the profile of • Gaining a better understanding of Cambodia´s migrants, as well as the impact of remittances on potential to raise domestic savings and private household income and behavior. investment by conducting a survey. Data on • Carrying out additional analyses around levels of domestic savings and investment in urbanization needs in Cambodia, as structural Cambodia is scanty and of poor quality. The 147 widening investment-savings gap makes strong • Carrying out household indebtedness surveys growth in investment increasingly vulnerable to gain a better understanding of the impact of to the external environment. In addition, at the both formal and informal micro-borrowing on moment, domestic investors have limited choices poor households. of savings and investment due to the relatively • Conducting an assessment of physical capital, large interest wage differential, lack of a domestic financial assets, natural capital, and social capital debt market, incipient and inactive stock market, by gender, in order to deepen the understanding and lack of pension funds and investment funds. of existing gaps. CHAPTER 6: Priority interventions to encourage sustainable development 148 References ADB, 2012a. 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Benchmarking Cambodia’s Development in a snapshot Variable Latest value Percentile Source (unless specified) Shared prosperity Poverty headcount ratio at USD 1.90 a day 6.20% 53 WDI (2011 PPP) (% of population) GINI index 30.8 83 World Bank estimate Income share held by the bottom decile 3.90% 94 World Bank Average growth of mean consumption per 8.50% 95 World Bank capita, bottom 40 percent Labor force participation 94 Employment to population ratio, 15+, total 82.20% 97 WDI, modeled ILO estimate (%) Labor force, female (% of total) 49.90% 94 WDI, modeled ILO estimate Human development Human development index rank (2014) 145 25 Hospital beds (per 1,000 people) 0.7 10 WDI Health expenditure, public (% of GDP) 1.50% 11 WDI % complete secondary schooling attained 4.51% 4 Barro and Lee School (% pop. Aged 15+) Attainment Dataset, 2010 Years of school attained (% pop. aged 15+) 4.72 15 Barro and Lee School Attainment Dataset, 2010 Macro and fiscal statistics in 2013-15 Real GDP growth (annual percentage) 7.10% 92 WEO, IMF Government revenue excluding grants (% 13.10% 2 Government Revenue of GDP) Statistics, IMF Total investment (% of GDP) 21.70% 48 WEO, IMF General government total consumption 21% 14 WEO, IMF expenditure (% of GDP) Broad money growth (annual %) 22.80% 97 WEO, IMF Annexes Agriculture value added (% of GDP) 30.40% 90 WDI Rural population (% of total) 79.50% 93 WDI 160 Table 16. continued Variable Latest value Percentile Source (unless specified) External sector Foreign direct investment, net inflows (% 9.50% 87 WEO, IMF of GDP) Import of intermediate goods (share of 38.50% 93 WITS exports) Export of intermediate goods (share of 2% 12 WITS exports) Economic complexity rank (2009-11) 111 16 Merchandise trade as % of GDP 144% 95 WDI Tourism receipts to total exports 28.90% 80 WDI Net ODA received, % of GDP 5.20% 68 WDI Remittance inflows to GDP (%) 1.20% 43 Financial inclusion Borrowed money from a financial 27.70% 95 Global Financial Inclusion institution (% age 15+) Database Received government transfers in the past 3.10% 10 Global Financial Inclusion year (% age 15+) Database Saved at a financial institution (% age 15+) 3.60% 9 Global Financial Inclusion Database Withdrawal in the past year (% with an 44.30% 2 Global Financial Inclusion account, age 15+) Database CAMBODIA: Sustaining strong growth for the benefit of all Business environment Global Competitiveness Index, 3.2 31 GCI, World Economic Forum Infrastructure, 1-7 (best) Average time to clear customs (days) 2 95 WDI Days required to start a business 101.3 4 Doing Business survey Getting credit (country rank) 12th 95 Doing Business survey Cost of business start-up (% of GNI per 122.90% 5 capita) Days to obtain an import license 5.9 93 Enterprise Survey, World Bank Group If a generator is used, average proportion 36.20% 85 Enterprise Survey, World of electricity from a generator (%) Bank Group % of firms expected to give gifts to secure 77% 2 Enterprise Survey, World government contracts Bank Group 161 Table 16. continued Variable Latest value Percentile Source (unless specified) Environmental sustainability Climate Risk index (rank for 1996-2015) 13 7 Germanwatch Natural Disaster Risk index 165 5 Environmental Protection Index 36.2 18 Institutions Global Competitiveness Index, Institutions, 2.4 28 GCI, World Economic Forum 1-7 (best) Control of corruption, -2.5 to +2.5 (best) -1 14 World Governance Indicators Government effectiveness, -2.5 to +2.5 -0.8 21 World Governance (best) Indicators Citizen Engagement in rulemaking score 0.4 26 Source: Find Your Friend tool using multiple sources. Annexes 162 Table 17: Cambodia’s progress towards the Millennium Development Goals CMDG Indicators Baseline Latest Year % 2015 Achievement Change Target Value Year Value Year 1. Eradicate extreme poverty and hunger Reduce Proportion of 44.5 1994 10.1 2011 -77% 19.5 Achieved extreme population living poverty by half below US$1.25/day (%) Reduce hunger Proportion of 32.1 1991 14.2 2015 -56% NA No Target, by half population below Significant minimum level Progress of dietary energy consumption (%) 2. Achieve Universal Primary Education Universal Net enrolment ratio 82 1997 94.7 2015 15% 100 Partially Primary in primary education Achieved Schooling (enrollees/100 children) 3. Promote gender equality and empower women Equal girls Ratio of girls to boys in 0.84 1994 0.97 2014 15% 1 Partially enrolment in primary education Achieved primary school Women's Share of women in 41.1 2000 40.9 2012 0% 50 Not Achieved share of paid wage employment in employment nonagricultural sector Women's equal Proportion of seats 5.8 1997 20.3 2015 250% NA No Target, representation held by women in Significant in national national parliament Progress parliaments (single or lower house only) 4. Reduce child mortality CAMBODIA: Sustaining strong growth for the benefit of all Reduce Under 5 Mortality 117.3 1990 28.7 2015 -76% 65 Achieved mortality of rate (deaths of under 5 year children/1000 births) old by two thirds 5. Improve maternal health Reduce Maternal mortality 1,020 1990 161 2015 -84% 250 Achieved maternal ratio (maternal mortality by deaths/100,000 births) three quarters Access Contraceptive 12.6 1995 56.3 2014 347% 60 Partially universal prevalence rate (% of Achieved reproductive women 15-49, married health or in union, using contraception) Unmet need for family 33 2000 12.5 2014 -62% NA No Target, planning (% of women Significant aged 15-49, married Progress or in union with unmet need for family planning) 163 Table 17: continued CMDG Indicators Baseline Latest Year % 2015 Achievement Change Target Value Year Value Year 6. Combat HIV/AIDS, malaria and other diseases Halt and begin HIV incidence rate (no. 0.08 2001 0.01 2013 -82% 0.4 Achieved to reverse the of new HIV infections/ spread of HIV/ year 100 people aged AIDS 15-49) Halt and Incidence rate and 584 1990 400 2013 -32% NA No Target, reverse spread death rate associated Some of TB with TB (no. of Progress new cases/100,000 population Incidence rate 207 1990 58 2014 -72% 50 Partially and death rate Achieved associated with TB (no. of deaths/100,000 population) 7. Ensure environment sustainability Reverse loss of Proportion of land area 73.3 1990 57.2 2010 -22% 60 Partially forests covered by forest (%) Achieved Halve Proportion of 23.4 1990 75.5 2015 223% 50 Achieved proportion population using an without improved drinking drinking water water source (%) Halve Proportion of 2.9 1990 42.4 2015 1,362% 30 Achieved proportion population using an without improved sanitation sanitation facility (%) Improve Proportion of urban 78.9 2005 55.1 2014 -30% NA No Target, lives of slum population living in Some dwellers slums (%) Progress 8. Develop global partnership for development Internet Users Internet users per 100 0 1990 9 2014 - NA No Target, inhabitants Some Progress 9. Demining Annual Annual number of 1691 1993 241 2009 0 Not Achieved number civilian casualties of civilian reported due to mines casualties reported due to mines ERW Percentage of 11 2000 45 2009 100 Not Achieved contaminated contaminated area Annexes area cleared Sources: United Nations MDG Country Progress Snapshot - Cambodia (August 2015) (http://mdgs.un.org/unsd/mdg/Data.aspx), Annual Progress Report on MDGs, RGC (December 2013), WHO/UNICEF Joint Monitoring Program-Cambodia (June 2015), and World Development Indicators (2015). 164 Annex 2: Insights into poverty measurement in Cambodia Poverty estimates in Cambodia are generated decrease (increase) the consumption aggregate from the Cambodia Socio-Economic Survey can also be mirrored in a decrease (increase) in (CSES), which the NIS conducts annually. The the poverty line, which offset each other. Whether methodology for measuring poverty, developed the resultant estimate in the poverty headcount jointly with the World Bank, was the basis for is lower (higher) than it should have been without poverty estimation for all rounds of the CSES the methodological changes depends on whether until 2008. The government departed from this the poverty line becomes disproportionately methodology after the Ministry of Planning (MoP), understated (overstated) than the consumption working under the oversight of an Inter-Ministerial aggregate. The estimated pace of poverty reduction Working Group, re-estimated the poverty line using then depends on the growth in consumption a different methodology starting with the CSES and the position of the poverty line relative to the 2009. Although poverty is still measured using the distribution of the consumption aggregate. For the cost of basic needs approach with consumption per same growth rates, poverty would decline faster capita as a proxy of welfare, three key changes were if the majority of the population is concentrated made in the computation of the poverty line and around the poverty line. Thus the level of the poverty consumption aggregate—(i) the estimation of the line and the distribution pattern of the revised non-food component of the poverty line uses the consumption aggregate matter for determining the average expenditures on 14 items consumed by the pace of poverty reduction. Measures of inequality 20th – 30th percentile instead of the non-food share are sensitive to the consumption aggregate too, in total expenditures for a reference population; but are independent of the poverty line. Changes (ii) estimation of the non-food poverty line is done that underestimate consumption of the well-off, like separately for Phnom Penh, other urban areas, and excluding imputed values of housing and durables CAMBODIA: Sustaining strong growth for the benefit of all rural areas based on the average expenditures in for example, tend to underestimate inequality. each strata;97 and (iii) imputed values of durables The World Bank’s sensitivity checks on these issues and housing were dropped from the consumption following international best practice methodology aggregate. In addition, the minimum calorie (Deaton and Zaidi, 2002) suggest the strong trend requirement increased from 2,100 to 2,200 calories in the decline in poverty and relatively low levels per person. of inequality. The qualitative conclusion of progress in poverty reduction and shared prosperity are The impact of these changes on the poverty thus broadly similar to those based on the national headcount rates and trends are ambiguous, poverty estimates. However, other data issues but sensitivity analysis support the qualitative pertaining to the survey described below, pose a conclusion that Cambodia made significant challenge to make an indicative statement on the progress on poverty reduction and shared level of the poverty headcount rates themselves. prosperity. The poverty line is always pegged to the consumption aggregate, so that changes that Changes to the methodology have an unambiguous upward bias of poverty in urban 97  The official poverty line in 2014 was 7,924 riel per person areas and downward bias of rural poverty. per capita a day in Phnom Penh, 5,434 in other urban areas, Urban households in Cambodia own more durable and 4,374 in rural areas. As of December 30, 2014, 165 Figure 54. Urban households are more likely than rural households to own durables Television Motorcycle 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 1 2 3 4 5 1 2 3 4 5 Welfare quintile Welfare quintile Rural Phnom Penh Refrigerator Bed set 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 1 2 3 4 5 1 2 3 4 5 Welfare quintile Welfare quintile Rural Phnom Penh Source: World Bank staff estimates from CSES (2014). assets (Figure 54), live in better dwellings and more than reflects spatial price differences. Data from generally spend more on non-food expenditures. the provincial CPI shows regional price variation of The methodological changes thus penalized urban less than 5 percent, for example. Evidence from other households in two ways. One is by raising the non- countries (see case for Indonesia in Ravallion and food poverty line beyond the price differences Bidani, 1994 and Mozambique in Arndt and Simler, between urban and rural areas, since average non- 2010) shows that separately computing “regional” food expenditures of the households in the 20- poverty lines without corresponding adjustment for 30th percentiles in urban areas are higher and thus utility consistency as done for Cambodia, distorts inherently reflect a higher level of utility or welfare. the poverty profile. In some cases urban households Annexes The poverty lines for rural areas and other urban with much higher consumption can be deemed areas respectively, are 81 and 46 percent lower than poorer than rural households with much lower levels the poverty line for Phnon Penh – a difference that of consumption (Alfani, et.al., 2012). This appears to 166 be the case in Cambodia too. Estimates based on the consumption aggregate is calculated from data the official consumption aggregate suggest that collected in the CSES using a recall instrument. the poverty headcount in Phnom Penh in 2014 was This asks for consumption for a broad group of 7 percentage points higher than rural poverty for items, for example consumption of cereals in example, yet other indicators of living conditions the past 30 days, instead of separately reporting like assets owned suggest that living conditions consumption of each of the items in this group. are better in Phnom Penh. Furthermore, by owning The quantity of items consumed is not recorded. more durables which reflect higher comfort in Therefore the diary, concurrently implemented living, welfare of urban households is understated with the recall instrument in most years (except more than in rural areas from the exclusion of use in 2012, 2013, 2015 and 2016), has been used to of value of such durables. This is not reflected in a estimate the poverty line instead. Our analysis finds proportionately lower poverty line for urban areas, that food consumption measured from the diary is since the poverty line is estimated using average consistently lower than food consumption measured consumption of specific goods rather than the non- from the recall instrument by between 18 to 40 food share in total consumption. At the same time, percent across all the years where both instruments the non-food poverty line in rural areas is inherently were used. The poverty line generated using diary calculated from a lower average expenditure on non- information likely underestimates the poverty line food items, thus underestimating rural poverty than implied from recall-based consumption measures. when national average expenditure on non-food The World Bank could also deepen its engagement items is used instead. in this area to extend to data generation activities of the NIS in addition to cooperation of the poverty Going forward, the government can potentially measurement methodology with the MoP, which is improve the way it measures poverty. There is currently reviewing the measurement of poverty in room for improvement in both the choice and design the country taking into account the factors raised of the instruments for measuring consumption and above. the methodology for calculating poverty. Currently, CAMBODIA: Sustaining strong growth for the benefit of all 167 Annex 3: Using Cluster analysis to inform prioritization in Cambodia Cluster analysis is a descriptive and multivariate data measured in multiple scales, the clustering statistical technique used to segment a is performed on factor scores from the principal population into groups that are homogenous component analysis of the variables specified above. but distinct from each other. Profiling these Of the three most common clustering procedures, groups reveals what makes them different and the hierarchical procedure is chosen over the other the differences can be exploited to customize two – partitioning methods (mainly kmeans) and interventions targeting each group. This can be two step-clustering (a combination of the first two). used to prioritize such interventions or identify the The hierarchical procedure is preferred because the biggest, most critical gaps across groups. This SCD in number of clusters is not known a-priori. For this particular, exploits this technique at the household SCD, finding out rather than assuming the number level using the CSES 2013 data to identify those key of clusters, helps inform the degree of segmentation determinants of poverty and welfare, which the within the population, in addition to analyzing the poor and near poor are most lacking relative to the profile of the different groups. better off. The identified gaps thus inform which are the most critical constraints not only for the The hierarchical and partitioning methods poor and near poor, but for the specific sub-groups apply different concepts to segmentation of the within them. population. In partitioning methods, the number of clusters (k) is predetermined, so the clustering Clusters are formed by placing observations into solution is formed by first randomly assigning groups so as to minimize within group variance observations to the fixed number of k clusters, before and maximize between groups variance. The reassigning the observations between the k clusters analysis involves four steps – selecting cluster until the within cluster variation is minimized. variables, choosing the clustering procedure and the In the hierarchical procedure, observations are number of clusters, and validating and interpreting grouped on the basis of a measure of similarity (or the results by defining and labelling the obtained distance) in a multidimensional space. In this case, clusters. The variables used in the cluster analysis the Euclidian distance function is used. Based on fall into the following categories – (i) household this, clusters are built from bottom up, starting with endowments in terms of physical assets (i.e. as many clusters as the number of observations, ownership of land and other productive assets) and assigning additional observations at higher levels human capital (mainly education attainment - share of aggregation, with a single cluster comprising of working age household members who attained all observations at the highest level or top of the no formal education, primary and at least secondary hierachy. Various clustering algorithms can be used, education, and health – measured by recent exposure but we base the analysis on results obtained using to health shocks), (ii) opportunities as measured by the wards linkage clustering algorithim, which household livelihoods (i.e. having a non-farm wage forms clusters by combining observations or smaller income, having a non-farm business), and (iii) access clusters whose merger increases the overall within Annexes to services (i.e. having improved water, improved cluster variance to the smallest extent possible. This toilet, and an electricity connection). Because the algorithm is both less influenced by outliers and the clustering variables are a mix of metric and categorical chaining effect whereby the cluster solution results 168 in one large cluster and other clusters comprising of Having established a clear hierarchy between a few observations. The optimal number of clusters the groups, we ask from the point of view of the is identified by inspection using a dendogram asset based framework, which (i) endowments complemented by quantitative criteria, the Calinksi – human and physical, (ii) opportunities – types and Harabasz pseudo F-Index or the Duda-Hart of economic activities, and (iii) risks are lacking Je(2)/Je(1) index. Four clusters emerge as the optimal or most prevalent among the poorer groups. We number for segmenting the households in Cambodia consider those assets most lacking among the poor by their socio-economic charateristics. but abundant among the better-off groups to be the most binding constraints the poor face. We also Once the clusters are identified, a profile of look at the asset portfolio of the poor and near poor the clusters was created, which is presented in to evaluate their risk factors, and take into account Table 10 in the main text. A profile for four groups the size of the individual groups to determine the clustered using the k-means was also reviewed importance of particular constraints or risk factors for robustness checks. The profile includes both at the national level. Greater weight is thus given variables directly used in the cluster analysis and to those factors affecting a larger group of people those not included – such as consumption per capita, and where the gap between the poorest and richest poverty rates, and the share of economically secure. groups are largest. Note that the inference is not The profile reveals a socio-economic ladder for causal, but rather provides a way of identifying Cambodia, which we refer to as the ladder of success. which factors among the known determinants of Groups from the cluster solution can be clearly household welfare are lacking or more abandant in ranked in accordance to their economic status with one group as opposed to another. daily consumption per capita ranging from $7.1 PPP 2011 dollars to an average of $4.1 PPP 2011 dollars The results show that success is more likely among at the bottom. Only 6.5 percent of the population in those who have transitioned out of agriculture the highest ranked group is poor or near poor and 55 and have more education, while among percent of people in this group can be considered to agricultural households large land holders are be an emerging consumer class. In contrast nearly 32 more likely to belong to the top group but health percent of the bottom group is considered poor or shocks are a big risk factor. Education attainment CAMBODIA: Sustaining strong growth for the benefit of all near poor and less than 16 percent are considered an clearly emerges as one of the defining gaps, while emerging class. So there is a clear hierarchy in terms inadequate labor (old age) is another emerging of the probability of success between groups. At constraint for the poor. Though they still own smaller the top are (i) young, high human capital non-farm than average land holdings, land still constitutes households, followed by (ii) young moderate capital, the main asset of the bottom two groups so both larger land owning households, then (iii) older, low their potential and risk factors are concentrated in human capital, moderate land owning housholds this area. This means improving productivity and and at the bottom of the ladder are (iv) older, many resilience and reducing risks in agriculture remain of then female headed, households with low human key priorities for improving livelihoods of the poor capital and lowest land ownwership. and near poor. 169 Annex 4: Cambodia SCD engagement with stakeholders The Systematic Country Diagnostic (SCD) was challenges, and goals for the future? conducted by the World Bank Group (WBG) in • What are the three most important areas for close consultation with national authorities and development in Cambodia, to focus on and other stakeholders. On top of drawing from the address over the next 5-10 years? best possible analysis and available evidence, it also sought to consider the views of a wide range Key stakeholders and meeting of stakeholders in Cambodia. Public engagements locations around the SCD aimed to identify key development challenges and priorities to accelerate progress in For over three weeks in November to December ending extreme poverty and sharing prosperity 2016, extensive public engagement meetings were widely in the next five to ten years. held with a broad range of stakeholders (central and sub-national government, National Assembly, Engagement format private sector, development partners, and civil society, including academia) to identify critical The engagement included face-to-face meetings as areas for development to be addressed to ensure well as an online platform to enable participation strong, inclusive, and sustainable growth and shared by a wide range of stakeholders. The face-to- prosperity in Cambodia. Nine meetings were held in face meetings had a mix of plenary workshops, four different regions of the country: six meetings roundtable meetings, and small group discussions. in Phnom Penh, one in Sihanoukville, one in Siem The online engagement gathered views through an Reap, and one in Kratie. In total, 375 participants online survey, in Khmer and English. from 13 provinces provided feedback on identifying and prioritizing the key development priorities to All the meetings held in Phnom Penh were conducted achieve sustainable poverty reduction and inclusive in English with simultaneous translation, while those growth in Cambodia. in the provinces were conducted in both English and Khmer. The meetings took around 3-4 hours, Engagement meetings were conducted with a wide including breakout group discussions, when needed. range of stakeholders, including: All meetings commenced with a video that captured the views of Cambodians from diverse backgrounds, • Government: Officials from the Ministry of and a slide presentation which presented preliminary Economy and Finance and line ministries ideas with regard to the main pathways to reduce • National Assembly: Parliamentarians extreme poverty and boost shared prosperity in • Sub-national Government: Elected members Cambodia. of provincial, district and commune councils of Takeo, Kampot, Sihanouk and Koh Kong After the presentation, discussions were held around provinces the following questions: • Development Partners: Representatives from Annexes UN agencies and other development partners • How do you see Cambodia’s development • Private Sector: Representatives of domestic achievements to date, its development 170 and international private sector companies and financial management reforms, in order to provincial chambers of commerce enhance service delivery. • Civil Society Organizations: Representatives of • Cost of doing business and trade facilitation: community-based organizations, service delivery reducing the cost to firm establishment and NGOs, advocacy NGOs, think tanks, research operation, including through an improved institutions, academics, labor unions, youth, and business environment as well as a reduction of LGBT people informal fees and electricity costs. Summary of priorities from the These priorities identified by the consultation consultations participants are embedded in all three pathways of the SCD, all aimed at maintaining strong and sustainable economic growth and boosting shared A clear list of priorities emerged from the prosperity in Cambodia going forward. Summaries consultations, with little variation across the regions of discussions from all the nine meetings are posted, of Cambodia where consultations were held. These in English and Khmer, on the consultation website were: for Cambodia. • Agriculture modernization: increasing https://consultations.worldbank.org/consultation/ productivity and incomes in agriculture, systematic-country-diagnostic-cambodia including through improved irrigation and access to markets. • Education and skills: investing in pre-primary, Tools for engagement primary, and secondary education as well as in technical and vocational education and training. Different tools were used to help identify • Institutions, governance, and public service priorities for the country’s development. First, all delivery: improving government efficiency participants were given a survey questionnaire (in through public administration and public English and Khmer; English version available, below) which asked them to identify the top three crucial development areas for Cambodia to end poverty CAMBODIA: Sustaining strong growth for the benefit of all Figure 55. Participants in consultations, and share prosperity more widely. The survey was by gender and stakeholder type completed by 322 participants and their priorities are shown in Table 18. Results from these questionnaires 90 Female Male also point to a similar set of priority areas as 80 11 identified during the face-to-face discussions, with 70 8 no significant differences in replies across genders 8 60 17 found. Second, participants were asked to provide 50 11 feedback during the meetings themselves. In four of 40 73 the nine meetings, groups of 8-10 participants were 67 30 64 51 asked, as a group, to identify their top three areas 20 43 8 for development. Approximately 190 people in 21 10 14 groups participated in this exercise and their results 0 are also summarized in Table 18. en al en ial Pr mbl al or ne t ty r t en se on nm tr cie nm c ct G P t t y rs er vin Pa pm er en Se i So As Nat ov C ov ro elo te The World Bank team also reached out to other vil iva ev Ci D G Cambodians around the country through colorful Source: Consultation meetings. 171 postcards that asked them about the future of these postcards and the results are summarized in Cambodia. More than 1,000 individuals filled up Figure 56. Table 18. Top areas for development from individual questionnaires and meeting discussions Priority Meeting discussions Survey Agriculture modernization 67% 41% Education and skills 56% 36% Institutions, governance, and public service delivery 33% 23% Cost of doing business and trade facilitation 33% 28% Resilient infrastructure and improved connectivity 28% 33% Healthcare 22% 41% Financial sector and access to finance 22% 28% Natural resource management and disaster risk management 17% 26% Source: Results obtained from consultation meetings. Figure 56. Top areas for development in collected postcards Top themes, by percentage of total collected postcards 20% 18.7% 15% 10% 8.6% 7.6% 7.3% 7.2% 6.8% 5% 0% n th e s lth n ad ur tio tio w ea Ro ult ro ca up H ric G u rr Ed Ag co o N Source: Results obtained from postcard collection. Annexes 172 Survey questionnaire Share your views! Cambodia: How to End Poverty and Share Prosperity More Widely? The World Bank Group (WBG) is undertaking engagements with stakeholders in Cambodia on the country’s development opportunities, and what can be done to end poverty and share prosperity more widely. The schedule of these meetings is posted on the World Bank Cambodia website. We are using this survey to get feedback from as many stakeholders as possible. Please take a few minutes to fill out this short survey. The feedback we get will not be attributed to any individual but will be consolidated, and a summary will be posted in the website. Type of organization you work for: Gender: [ ] male [ ] female 1. Government Agency 2. Civil Society 3. Academia Province:___________________________ 4. Private Sector 5. Development Partner 6. Other: Cambodia’s drivers and upcoming challenges • What do you think have been the main drivers of strong growth and poverty reduction in Cambodia over the past two decades? What have been the main factors? • Thanks to sustained economic growth, Cambodia became a lower-middle income economy in 2015. What do you think are the main challenges to sustain growth and poverty reduction Cambodia faces going forward (over the next decade or so)? CAMBODIA: Sustaining strong growth for the benefit of all Cambodia, areas for development In your view, what are the crucial development areas for Cambodia to focus actions aimed at ending poverty and share prosperity throughout the country over the next decade? (Please, circle with your pen your top 3 priorities). • Improving water resource management, protecting households that depend on fisheries • Improving public investment management to boost infrastructure • Reducing the cost to firm establishment and operation, including improving the doing business, and tackling corruption • Moving towards a cheaper and more reliable electricity supply • Facilitating domestic savings and private investment • Strengthening the regulation and supervision of the financial sector • Improving access to financial services – bank accounts, credits for individuals or firms, mobile financial services, investment products, consumer financial education 173 • Improving macroeconomic management and reducing dollarization • Investing in infrastructure and connectivity for growth and inclusion, including roads and better logistics • Improving forest management to reduce/stop degradation • Modernizing agriculture through investing in irrigation and facilitating machinery acquisition to improve productivity • Public administration reform for public service delivery • Reducing malnutrition to unlock children’s potential and to promote growth and inclusion • Investing in pre-primary education • Fostering attainment of secondary education and above • Improving access to and quality of health services and protecting households from financial shocks related to health spending • Consolidating and expanding social protection and social safety nets • Putting in a place a strengthened disaster risk management system to protect against the impact of floods, droughts, earthquakes, etc. • Equality and no discrimination among genders, including LGBTI (Lesbian, Gay, Bisexual, Transgender and Intersex people) • Supporting information and communication technology adoption, as well as innovation • Enhancing the allocation and effectiveness of public expenditure and overall fiscal and debt management • Investing in a well-planned urbanization process to accommodate economic transformation • Other: __________________________________________________________ • Other: __________________________________________________________ • Other: __________________________________________________________ Annexes 174 Cambodia Country Office Exchange Square Building Floor 10th IBRD and 11th IFC Streets 51-61 and streets 102-106 Sangkat Wat Phnom, Khan Daun Penh Phnom Penh, Cambodia www.worldbank.org/cambodia