Cambodia cannot continue to rely on low wages to attract investment and must switch to developing skills, infrastructure and innovative industries in order to continue its record of robust economic growth, the Asian Development Bank said on Thursday.
The bank’s Asian Development Outlook 2017 report, released on Thursday, forecasts strong growth for Cambodia’s economy over the next two years and explores the key development challenges that middle-income countries face in taking the next step.
While GDP growth is projected to rise slightly to 7.1 percent this year and next, up from an estimated 7.0 percent last year, the report says that reviving agriculture is “critical to sustaining rapid growth and poverty reduction.”
The report indicates that Cambodia’s robust growth rate continues to be driven by garment and footwear exports. Construction and real estate, rising government expenditures and a moderate recovery in agricultural production also contribute.
Jan Hansen, senior country economist for Cambodia at the regional development bank, said the report’s examination of middle-income economies was timely for Cambodia, which was last year upgraded from low-income to lower-middle-income status by the World Bank.
Advancements in infrastructure, skills and technological innovation need to be the focus for middle-income economies, he said.
Progress in those three categories can help Cambodia eventually transition to a high-income economy, he said.
“The successful model for middle-income countries who have already succeeded to advance to higher-income countries is the emphasis on productivity rather than the increasing the input of production,” Mr. Hansen said.
“Middle-income countries who have successfully graduated to high income have more than 2.5 times the research and development workers than those middle-income countries which have not [succeeded].”
Cambodia must also foster an economic environment that encourages innovative businesses, he said.
“It is then entrepreneurship which is turning the new ideas, or the new technology, into new innovation growth,” Mr. Hansen said.
“Middle-income countries should encourage and nurture new business entries…involved in new technology and providing products or services that are new to the market.”
While the short-term economic growth outlook for the Cambodian economy remains strong, Mr. Hansen said the country could not continue to rely on cheap wages due to the emergence of a skills gap, as new, higher-value businesses require trained workers that are unavailable in the country.
“In the longer perspective, Cambodia’s successful growth model in attracting foreign investment through inexpensive low skills and abundant labor—which has delivered the impressive economic expansion over [the] recent past—may not be liable much longer,” he said.
“Productivity growth has been slow, while labor cost and skill shortages are increasing.”
Samiuela Tukuafu, the bank’s country director for Cambodia, said the financial sector was another potential vulnerability.
A financial shock abroad could dry up funds from foreign investors, creating pressure on local banks, he said.
“That will create several problems: lack of liquidity, high non-performing loans,” Mr. Tukuafu said.
He recommended hastening the implementation of the government’s 10-year industrial development policy in order to lower the cost of doing businesses and improve productivity growth.
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