Cambodia’s great step forward

The kingdom is looking to shake things up with a massive infrastructure push – with the help of some friends

Cambodia, like everywhere else, took an economic hit during the COVID-19 pandemic crisis. But, overall, it weathered the worldwide shutdown with surprising aplomb – there were very few deaths and relatively few illnesses recorded.

GDP increased by 3% in 2021 and by 4.8% in 2022, when much of the rest of the world was still reeling from lockdowns and attempting to remember how to do business-as-usual.

Of course, Cambodia was shaken as was everywhere else, but recent policy has been less focused on recovering from COVID-19 than about galvanizing the country’s business base and building on burgeoning economic growth.

Take the Asian Development Bank (ADB)’s forecast that Cambodia’s economy will grow by 5.8% in 2024. That’s up from 5.6% in 2023, when countries worldwide were still wobbling from the aftershocks of work-from-home (or don’t work at all) and moribund consumption.

The Cambodian government has to be commended for organized mass vaccinations in conjunction with efforts to improve the kingdom’s social welfare system.

All the same, Cambodia’s economy continues to be built on high-volume, inexpensive, low-skilled products.

As one Cambodia country report recently put it, “In terms of business, Cambodia has positioned itself as China’s extended workbench, especially for the apparel, footwear and bag industries. This requires close integration into Chinese-dominated supply chains and access to the primary sales markets in the United States and Europe.”

In one sense, that’s a plus for Cambodia, as China moves up the value chain and foreign businesses look to lower costs by relocating to other regional manufacturing centers, of which Cambodia is an obvious choice.

And otherwise and similarly, the good news for businesses doing precisely that, is that it’s far easier to ensure business is being done right in Cambodia than it is – or ever was – in China. Cambodia may not be the most transparent of places to do business, but it’s relatively safe to carry out due diligence and ensure that contractors are as good as their word. That has never been the case in China.

Infrastructure renaissance

The bigger and longer-term story for Cambodia when it comes to escaping from its current low-value place on the value chain is its skilling-up of its workers, making its energy network more affordable and reliable and establishing a reliable transportation infrastructure.

That’s important because Cambodia – despite more than two decades of rapid economic growth – has grown faster than many of its neighbors despite some of the worst infrastructure in Southeast Asia, according to the World Bank’s logistics performance index.

Cambodia, under its latest government headed by the son of decades-standing strongman Hun Sen, Prime Minister Hun Manet, is looking to overcome those limitations with what some are calling an infrastructure renaissance. To be precise, Cambodia is shooting to spend USD 36.6 billion to fund a 174-project master plan that would overhaul the national transportation and logistics network – and within just a decade.

It’s an ambitious plan, but Cambodia has some friends with deep pockets – China, most obviously, but let’s not forget Japan.

China sees Cambodia – with its deep-water port in Sihanoukville – as a key ally in its Southeast Asian geopolitical and economic strategic ambitions and has been deepening its relations and economic commitment to Cambodia’s development. But Japan’s commitment to Cambodian development should not be overlooked.

China overtook Japan as Cambodia’s primary development partner in 2007, but Japan has overseen 210 investment projects in the Kingdom since 1994 and continues to be a major investment player to this day.

In other words, the Cambodian government’s 174-project master plan is not a mere pipe dream – or not necessarily so.

Some of the other rhetoric may be, however. The stated goal (more a domestically driven political aspiration than a tangible plan) is to make the kingdom a middle-income nation by 2030, a high-income nation by 2050.

To put that in some perspective, despite gains in poverty reduction, 50% of Cambodians still live on only USD 4.15 or less a day. There are, of course, other perspectives that sit on the sidelines as challenges to Cambodia’s ambitions.

Nevertheless, Cambodia is starting at a low base and as World Bank Country Manager for Cambodia Maryam Salim puts it, “Cambodia can … strengthen competitiveness by improving the business climate, streamlining trade procedures at borders, making the energy supply more reliable and strengthening education.”

Given all the current projections and the general lay of the land, Cambodia has nowhere to go but upwards. It saw an average GDP growth of some 7% in the decade pre-pandemic and the World Bank expects growth to reach 6.1% in 2025 and 6.4% in 2026 as garments, travel goods and other growth drivers such as tourism propel the economy.

Blessed demographics

Cambodia borders booming Vietnam and a solid – if simultaneously stolid – Thailand (as well as Laos in the northeast). In the aftermath of Pol Pot’s disastrous Year Zero assault on the nation, the world – albeit after some political hesitation due to the intervention of Vietnam and other factors – rushed to Cambodia’s aid.
Cambodia will unlikely pull off its 2030 vision and suddenly become an upper middle-income country. It would be a magical transformation. But Cambodia can certainly reduce poverty – and let’s not forget that it’s a demographically blessed nation in a world of declining populations and productivity.

Some 65% of Cambodians are 30 years old or younger.

Such numbers are the envy of far more advanced regional neighbors such as South Korea, Japan, China and even Thailand.

All the above give Cambodia a leg up in a challenging global environment. Geopolitical challenges aside – China, Taiwan, the Philippines and Japan are in a tense standoff that shows no sign of abating anytime soon. Global trade continues to be anemic, debt levels high, while flows of global investment raise the specter of insecurity for small nations like Cambodia, which are highly reliant on globalized trading to retain robust economies.

In short, slower growth is globally general but for the most part Cambodia is bucking that trend due to its geographical location and price competitiveness with China in a world that may be having second thoughts about globalization but is far from being able to wean itself off it.

Meanwhile, the tourists are returning – in the first quarter of 2024 to 84% of pre-pandemic levels – and exports are returning to healthy levels, with the US as No 1 export market and the Association of Southeast Asian Nations (ASEAN) No 2.

Friends count

Back to the infrastructure drive: if the Cambodian government and its foreign friends don’t make it happen at least more than less, Cambodia’s infrastructure will become stretched to a breaking point if the country’s economy grows much faster.

Speaking to Al Jazeera, Matthew Owen, vice chairman for the transport and logistics committee for European Chamber of Commerce in Cambodia, said that Cambodia’s infrastructure plans are necessary, but will also require that the kingdom raise standards across the board so that it can raise the value of its exports.
It’s undoubtedly Cambodia’s best game plan.

“Having everything there means they’re going to be able to draw more people in to invest and do business,” Owen told Al Jazeera.
The more the merrier – heavyweights such as China and Japan notwithstanding. According to Owen, Cambodia is garnering attention from corners other than northeast Asia.

“Everybody’s got an influence, everybody’s got something to gain, and it balances the influence from China,” he said.
“It’s like a pool of countries trying to be Cambodia’s best friend.”

Everything signals at present that the Cambodian government is serious in its intentions to move up the value chain and be a big-hitter in the region despite its small size. It has investment allies.

For business investors with an eye on the future, that’s obviously not a signal to throw everything and the kitchen sink at Cambodia, but it does signify that the kingdom has a place in a diversified portfolio.

If there’s one thing that can be said about Cambodia with confidence it is that resilience is on its side. In the short term, that will not make business for foreign investors vastly easier, but the long term will likely be a very different story.