Supporting inclusive and sustainable economic growth in Cambodia

27 Jan 2016

 Photo: ©ILO Better Factory

Cambodia has made great progress in economic growth, poverty reduction and human development and is poised to become a Middle Income Country (MIC) soon, and aims to achieve Upper MIC status by 2030. The ongoing challenge is that a significant proportion of the population remains vulnerable to slipping back to poverty. While labor participation is high and the employment-to-population rate in Cambodia is among the highest in the world, if this vulnerability is to be addressed, there is a need to expand opportunities for decent employment particularly for women. To these ends, there are a range of challenges that UNDP is collaborating with Royal Government of Cambodia to address.

One challenge is improving incentives to invest in human capital. Completion rates at lower secondary education are too low if Cambodia is to take advantage of its demographic dividend. Households spend far too little on education given that private returns, while not negative, have steadily been declining. Moreover, because of the Khmer Rouge period, Cambodia does not have the critical mass of middle-aged parents that can finance the education of the youth. While the current reforms in the education sector are vitally necessary, these must be complemented by larger economic reforms.

The economic and social upgrading of Cambodia's economy and exploiting opportunities offered by regional value chains is necessary. This means going beyond low value-added industries such as manufacturing, agriculture and construction. Higher value addition also creates opportunities for backward linkages to small and medium enterprises. Social upgrading is important because Cambodia needs better paying employment and working conditions, at a scale. Without the social upgrading of its industries, it will be difficult to reverse the declining private returns to education. In this regard, UNDP supported policy research that contributed to the formulation of the Industrial Development Policy of Cambodia launched in 2015.

Economic and social upgrading is needed if Cambodia is to improve domestic resource mobilization and increase the levels of public spending to MIC levels. In the transition to upper MIC status, international experience shows that public spending reaching a threshold if a country is to build resilience, accumulate human capital, and crowd-in private sector investment. In Upper Middle Income Countries, public spending average at 14-15% of GDP. With Cambodia’s public spending at 6% of GDP, financing public spending on an economy built on a large informal sector, vulnerable employment, subsistence agriculture, or low value-added industries will be challenging. UNDP has supported government efforts to coordinate Official Development Assistance. Over the next Country Programme period, from 2016-2018, UNDP will work with the government on how best to leverage other sources of development financing.

Environmental degradation and climate change are also other sources of vulnerability. Given the dominance of subsistence farming, many rural households depend on the viability of ecosystems including water, soil quality, non-timber forest products, and biodiversity which are potentially threatened by unsustainable rates of deforestation, the network of dams in the Mekong River Basin, and climate change. It does not help that Cambodia is among the top ten countries vulnerable to climate change. What is going for Cambodia are recent initiatives to strengthen environmental governance, which could go a long way ensuring a whole of government approach to the environment and natural resource management. Cambodia also has a comprehensive Climate Change Strategic Plan that mainstreams a climate change response in public investment plans across government agencies. UNDP is providing technical and financial support both the environmental governance reform effort and the climate change policies of the government. UNDP also supported the formulation of the National REDD+ Strategy that was presented in COP 21 in Paris, in 2015.

By Napoleon NAVARRO, Senior Policy Advisor

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