Keynote Address at the Opening of the 4th Cambodia Economic Forum

Keynote Address at the Opening of the 4th Cambodia Economic Forum on
“Cambodian Economy in Post-Crisis Environment: Industrial Policy-Options Toward a Sustainable Development”

Peace Building, 16th February 2011

Excellencies, Ladies and Gentlemen,
Distinguished National and International Guests!

Today, I am honored and pleased to deliver the keynote address in the opening session of the Fourth Cambodia Economic Forum (4th CEF) on “Cambodian Economy in Post-Crisis Environment: Industrial Policy- Options Toward a Sustainable Development”, organized by the Supreme National Economic Council. Taking this opportunity, I would like to express my warmest welcome to all distinguished national and international guests for attending this important event. Once again, I would like to thank UNDP, ADB, the World Bank and other Development Partners for the continuous support in all sectors for the development of Cambodia, which includes institutional capacity building such as through this important Forum.

During the 3rd Cambodia Economic Forum, our deliberations were held in the context of Global Financial Crisis and a severe economic downturn. Our main concern at that time was to quickly put in place measures to prevent the adverse impacts of the Global Financial Crisis on the Cambodian economy. During that time, in my capacity as the Head of the Royal Government, I had set out a package of policies to reduce and mitigate the impacts of the Crisis on our economy. Through the firm implementation of those policies, the Royal Government has led the Cambodian economy out of the Crisis and has successfully addressed its negative impacts. The living standard of the people has been maintained as well as macroeconomic stability, which are needed for ensuring social stability. The recovery path is “V”shaped, reflected in the following significant indicators:

First: The growth rate after declining in 2009 due to the Crisis recovered to 5.5% in 2010; in 2011, it is expected to be more than 6%. In the medium term, Cambodia’s economy is projected to grow at around 6% to 7%. Inflation was around 3.5% in December 2010 over December 2009. In the medium term inflation will continue to be low and stay below 5% although we have to be wary of spillover from regional inflation and hike in oil prices. Cambodia’s financial and banking sector remains strong and healthy; liquidity in the banking sector has increased, due to increase in credit allocation for economic activities.

Second: Agriculture grew impressively during and after the Crisis. In 2010, the sector grew by 4.5%. Paddy rice sub sectorgrew by 6.0% and other subsidiary crops by 8.4%. Since high priority has been given to this sector by the Royal Government, we expect that this sector will continue to grow at a fast rate in the future also.

Third: Manufacturing and agro-industry sectors have also continued to grow. The garment sector severely affected by the Crisis in 2009 grew by 28% in the first 11 months of 2010, producing a total revenue of USD 3 billion. Reflecting the favorable impact of the rice production and export promotion policy announced in 2010, the official rice export increased by 45% in the first eleven months of 2010, over the corresponding period in 2009 (revenue USD27.5 million). Investments on food, beverage and tobacco industries have also substantially increased in response to the new policy.

Fourth: The services sector remains strong. It grew by 4.6% in 2009 and 6.4% in 2010. Tourism sector has a high potential for growth. The tourist arrivals in Cambodia increased by 16% in 2010 ( 2.5 million tourist arrivals). In 2010, the total revenue from tourism was expected to increase by 14% (revenue USD1.78 billion). During the post Crisis period tourist arrivals in the region have continued to grow, particularly Chinese tourist arrivals.

A key initiative was the fiscal expansion policy which focused on increasing public investment in physical infrastructure, such as consruction and repair of bridges, roads and irrigation systems to improve connectivitity and agricultural productivity; and provision of social safety net through capacity building and training of Cambodian laborers. This has laid a good foundation to expand growth and ensure sustainable development.

Taking this opportunity, on behalf of the Royal Government, I would like to express satisfaction and appreciation to the Ministry of Economy and Finance, the National Bank of Cambodia as well as other relevant Ministries/Institutions who have put in a great effort to successfully implement the policies in the package which I set out during the previous Cambodia Economic Forum for mitigating the impacts of the Crisis.

The present Forum is gathering at a time when the global economy, in particular the Cambodian economy has just recovered the Crisis. The time is appropriate to set a long term vision taking into account the fast and substantial changes occurring in the global economic architecture. Cambodia should quickly adapt to the evolving environment and seize the new opportunities, stemming from these changes to ensure its sustainable development.

I think the selection of the subject for today’s forum on, “Cambodian Economy in Post-Crisis Environment: Industrial Policy-Options Toward a Sustainable Development”, is appropriate, significant and timely. The Forum provides an opportunity for distinguished national and international participants to dialogue and exchange views on how best Cambodia can capture newly emerging opportunities and reduce risks and threats facing the economy during the process of development. I would like to share with you some thoughts which you may wish to deliberate on, in the Forum.

Let me start by making an overall assessment of the post Crisis global economic environment. The severity of the Global Financial Crisis was of a scale not witnessed since the Great Depression of the 1930s. Even though the world seems to have weathered the Crisis, the future is fraught with uncertainty in a number of regions. Global economic growth of 4.8% in 2010 was fairly strong compared to 2009 when global income contracted by -0.6%. However, this growth is fragile and uneven among countries. Developed economies grew by 2.7% in 2010 after declining by 3.2% in 2009; in contrast developing economies grew by 9.4% in 2010. Growth was particularly strong in Asia. In 2011 the trend of sluggish growth in the developed world and robust growth in the developing countries will likely continue.

The recent high economic growth in Asia was largely driven by strong economic growth of China, which is expected to emerge as a driver of global economic growth in the future. There is general agreement that Asia has led the world out of the Crisis and in the future Asia will provide the momentum for world economic growth. We have witnessed solid evidence of sustained growth in a number of emerging countries such as China, India and Indonesia. Fiscal stimulus provided in a timely manner helped stabilize these economies during the Crisis and keep their growth performance largely on track. However, fiscal expansion is a short term initiative and cannot ensure sustained growth; long term solutions for sustaining development momentum will have to be found. A key issue is deepening economic policy coordination at the global level. Many analysts believe that rebalancing the global economy and placing more reliance on domestic demand to foster Asian growth will be the key to ensuring the sustained recovery of the global economy.

The Crisis has served as a wake-up call for many developing economies like Cambodia. The need for rebalancing global demand and implementing policies to reform market structure to ensure sustained future growth has forced Asian economies to reduce their heavy reliance on the US and European export markets to generate growth and pay greater attention to the creation of domestic market demand through monetary, fiscal and structural adjustment policies.

How should Cambodia respond to the emerging trends in the global economy I outlined earlier?

In the Rectangular Strategy for Growth, Employment, Equity and Efficiency, the Royal Government has laid out ambitious goals. First, we have to ensure sustainable economic growth of around 7% per year on broader and more competitive economic basis. Second poverty incidence should be reduced at the rate of more than 1% per annum. In order to achieve these ambitious goals, I am of the view that in medium and long term, the Royal Government must focus attention on a number of key strategic issues:

First- the necessity to ensure sustainability of high economic growth in order to promote and accelerate poverty reduction

Second- the necessity to diversify the growth base that is currently narrow

Third- the necessity to solve unemployment and lack of skill training in the youth cohorts and equip them to cope with the challenges caused by unforeseen changes in the economic structure.

Let me elaborate the strategies of the Royal Government to address these issues.

Since Cambodian economy is still small sized ensuring high sustainable growth with steady poverty reduction will require Cambodia to adopt outward- oriented policy aimed at achieving economies of scale and receiving transfers of financial resources, technology and other vital knowledge and know-how. In the context of the drastic shift in the global economic environment Cambodia must seize market opportunities and harness them for national economic development. This will mean a diversification of the growth base of the economy.

In the post-crisis global economic context, the Royal Government’s Economic Strategy will mainly focus on:

1. Effort to maintain and further promote the current Cambodian markets, including US and EU markets. Even though US and EU economies are still facing challenges as well as some risks, those are likely to be only temporary. In the medium term these economies are expected to recover. Moreover Cambodia needs more time to prepare and penetrate the regional market chain which provides new opportunities.
2. Efficiently seize new opportunities emerging from the Asian Economic Recovery; as the slogan puts it “Look East” .This should be achieved through strengthening the implementation of the policy of integrating national economy into regional economy with active participation in the initiatives of all the bilateral, multilateral, regional and sub-regional cooperation frameworks. Within these frameworks the high economic growth of developing economies in Asia such as China and India, coupled with the policy to promote domestic demand in Asia, will certainly provide important opportunities for a small country like Cambodia to increase exports and gain from technology transfer. The rise in wages and production costs in countries like China and Vietnam in the region can make Cambodia a more attractive investment destination.
3. Continue to successfully implement investment and business improvement policy in the spirit of active management.Cambodia will continue to emphasize political stability, security, social order, macroeconomic and financial stability and trade and business facilitation including reducing bureaucracy, implementing “single window” or “single roof”mechanism, and eradicating unofficial fees and illegal checkpoints. The Royal Government will pay special attention to investment in physical infrastructure, especially roads, bridges, irrigation system, electricity network and clean water supply system as well as lay out and implement necessary measures, aimed at reducing transportation costs and electricity charges and strengthening and increasing the efficiency of vocational and skill training, which are needed to improve the competitiveness of Cambodia.

The Royal Government has acknowledged that the Cambodian economy cannot continue to rely on garment manufacture, tourism and construction sectors in order to promote sustained growth. We must expand our sources of growth by seizing opportunities emerging from the global and regional developments and by nurturing the industrial sectors in our economy with good growth potential Our excessive dependence on garments focused on a few market destinations in the developed world and tourism was the main reason why our growth performance faltered during the recent Crisis. We cannot allow this experience to repeat.

During the last decade, the Royal Government gave high priority to the development of agriculture to address poverty reduction and rural development. Our reasoning is simple. Cambodia is an agriculture based country. Agriculture contributes to about a third of the national product at present. Approximately 80% of Cambodian people are living in the rural areas, and about 70% of total labor force is in the agriculture sector. Agriculture has a high potential for development because of favorable climate and terrain, abundant water and good irrigation. With the use of modern technology and better agricultural techniques such as the use of vehicles, seeds and fertilizers agricultural productivity could be further improved. We have many opportunities to diversify the economic growth base by promoting agricultural development. Agricultural development will also help us effectively address the poverty issue that is ubiquitous in the rural areas of Cambodia.

In general, the measures taken by the Royal Government to respond to the Crisis were effective in pulling the country out of the Crisis. Nevertheless, we also know that this situation could change in the future and we have to carry out reforms to increase the resilence of the economy. The policy measures to promote agricultural productivity include encouraging the use of vehicles modern technology and techniques, and increasing farmer’s skills particularly for reducing the use of labor in agriculture. The Royal Government has to be long-sighted and prepare long-term strategies for matching the training and supply of labor force with the needed set of worker quality and skills required by the changes in the national economic and labor market conditions.

Cambodia has a labor force of about 7.4 million in the age group15 to 64. Every year, about 200, 000 people join the formal labor force. This is an important comparative advantage for Cambodia since the country has an abundant supply of young and low cost workers. But in parallel, we have to create about 200,000 jobs annually to absorb these workers. This along with the pressures created by rural urban migration can stress the labor market and the socio-economic environment of Cambodia in the future. Recent experience of social and political instability in some countries has confirmed the importance of solving unemployment particularly among the youth. This issue is closely linked with the problem of poverty reduction and ensuring sustainability of growth through promoting the diversification of economic growth base and the restructuring of the national economy.

There is no doubt that there is an urgent need for Cambodia to modernize its economy; in practical terms this means “Promoting the Development of Industrial Sector”. Modernizing the economy by promoting industrial development is an appropriate and necessary solution for achieving sustainable growth of the Cambodian economy and take it to a higher stage of development. It would help Cambodia avoid the “Middle Income Country Trap” that has crippled a number of countries from moving further after achieving a middle income level due to a lack of industrial capacity including technological know how. The industrial development strategy should focus on transforming the economic structure by providing more value added from a wider economic base that can ensure sustained growth with equity.

Our primary and practical objective is to upgrade our economy through promoting the development of the industrial sector that would lead Cambodia toward a “New Phase of Economic Base Diversification” through the use of our endowments and placing reliance on our comparative advantages. In this effort our priorities will be (1) promoting the development of agro-industry and agro-business in the medium term that supports the upgrading of important existing pillars of economic growth such as agriculture, garment and tourism sectors, (2) expanding capacity of some handicrafts and small industries which have the potential to evolve as core forces for promoting growth to serve exports and domestic markets and (3) discovering new industries with latent comparative advantages in order to link Cambodian economy with the value chain of regional and global production networks.

Indeed, the concept of industrial development policy seems to be broad as outlined by me earlier as we have not specifically determined the sectors that Cambodia should focus on. In general, designing industrial policy of each country requires the determination of priority sectors that are in line with comparative advantages and endowments of those countries. In this regard, Cambodia has important endowments such as water, land, mineral ores and a young labor force, and an excellent geo-strategic location at the center of ASEAN region. Certainly the economic potential of Cambodia is immense. The market mechanism will ultimately determine which industrial sectors of our country emerge as the country’s growth pillars. The role of the State is that of a strategic visionary, a manager of the development process, a provider of coordination and a facilitator of the market mechanism. I will revert to some of these roles of the state later. I would now like to dwell on the strategic and fundamental directions of Cambodia’s industrial development policy.

First: Capturing more value added of existing core sectors

We have observed that three important sectors of the economy have achieved remarkable development in the past, viz. agriculture, garment manufacture and tourism. This is attributed to our comparative advantage in land, climatic conditions and low labor cost, existing trade opportunity, and our rich cultural heritage. In the future, these three sectors will continue to play a key role to support the national economic growth, especially agriculture and tourism sectors that will maintain their importance in the long run. The garment sector would continue to be important for economic growth at least in the medium term. However so far Cambodia has been able to capture only a small part of the whole value chain of these sectors. For example, the rice sub sector of Cambodia exports almost 100% of unprocessed paddy rice; in garment sector, we only get the value added from Cut, Make and Trim stage in the entire manufacturing process, and in the tourism sector, we only get low value added from simple services such as air ticket fees, restaurants, guest houses and local transportation.

A strategy of pursuing a more complete linking of Cambodian industry with the entire value chain of activities in the concerned sector will allow Cambodia to gain more value added. For example, in the value chain of the garment sector the establishment of a buttons manufacturing factory to supply buttons to garment factories will create more employment and allow capture of more value added from garment manufacture.

Cambodia’s agriculture sector not only has enormous potential for further expansion, but can capture more value added. Forward linkages of agriculture with agro-businesses, agro-industries and SMEs can effectively contibute to higher value added from this sector and will be in line with the Royal government’s strategic objective of achieving growth with equity through industrial development.

Second: Upgrading emerging industries with growth potential

Apart from three sectors mentioned above, there are other existing industries in Cambodia which could evolve as new areas of comparative advantage. The new industries can emerge from fragmented and informal businesses that already exist in Cambodia. These include for example, furniture, handicrafts, paper/recycled paper, construction materials, household appliances, simple electronic equipment, oil and gas, mineral ores and fertilizer. These industries need to be closely studied to assess whether they can be competitive in the domestic and export markets. For example the Royal Government can study and identify Cambodia’s comparative advantage in developing oil and gas industry as well as mineral ores. The study will enable the Royal Government to introduce appropriate policies to upgrade and develop the emerging industries with good growth potential..

Third: Discovering latent comparative advantage

Cambodia is a late entrant in industrial development. Considerable progress has been already achieved in science, technology, business and trade facilitation and development of logistics in the world. Globalization has contributed to dissemination of knowledge in many of these areas. Cambodia can use the lessons learned by other countries and use their experience to identify areas of latent comparative advantage. In some cases, I think that we can import technology. If we have appropriate strategies we can attract large scale multinational enterprises to set up new industries in Cambodia under the industrial park framework or in special economic zones supported by incentives and business facilitation based on specific frameworks and conditions.

It is clear that strategic industrial development is needed to bring about economic transformation and holds tremendous promise of success. To ensure success we have to integrate the industrial development policy into the general development policy systematically and consistently with interconnected policy measures. This reemphasizes importance of the State’s role in creating an educational system consistent with industrial development requirements. The other roles of the State include management of the development process and facilitating efficient functioning of the market mechanism.

I am confident that Cambodia now has appropriate favorable conditions to move forward to the next higher development stage. We have maintained complete political stability and peace for more than ten years. During this period, we have built physical infrastructure assets such as roads and bridges, irrigation projects, electricity networks and communication systems in many areas of our country. The Royal Government will continue providing high priority to public investment and the construction of all kinds of physical infrastructure.

At the same time, the Cambodian economy has been actively integrated into the regional and global economy. Cambodia is endowed with a young and dynamic labor force which is keen to learn and work very hard. The labor cost in the country is low. The Royal Government is determined and strongly committed to reform key sectors to ensure macroeconomic and financial stability as well as to improving governance, enhancing institutional effectiveness and capacity development. The reforms are aimed at reducing barriers to business and facilitating active participation from the private sector. These are the pre-conditions and key requirements to move forward on the development process.

I have already elaborated the necessity and key objectives of modernizing our national economy through an industrial development strategy for diversifying the Cambodian economy.. We might come up with some different views on the direction of Cambodia’s economy in this Forum. But I firmly believe that all of us are fundamentally agreed that Cambodia’s economy needs to be further advanced and its economic base has to be diversified by exploiting effectively and efficiently its comparative advantage in order to ensure sustainable development. This is a definitely a complicated assignment, which requires us to study in depth and carefully design a step-by-step strategy for implementation. In this spirit, I highly appreciate and welcome your constructive ideas, comments and recommendations.

Before ending, on behalf of the Royal Government and myself, I would like to take this opportunity to express my appreciation to the Supreme National Economic Council, which is the Social and Economic Policy Think Tank of the Head of the Royal Government, for organizing this Forum. I would also like to express my sincere thank to UNDP, ADB, World Bank and other Development Partners, in particular Japan and China as well as other Line Ministries and Agencies for their strong support for both technical and financial assistance to meet the capacity building needs of Cambodia. I believe that our cooperation will be further expanded in the future.

I would like to thank Excellencies, Ladies and Gentlemen, and in particular those coming from outside Phnom Penh and Cambodia for spending your valuable time to participate in this Forum.

Finally, I wish the forum a fruitful and active discussion. I am confident that your deliberations will contribute significantly to the formulation and preparation of development policies and strategies for Cambodia.

I wish you all the four gems of Buddhist blessing: Longevity, Nobility, Health and Strength. May I now declare the opening of the Fourth Cambodia Economic Forum!