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Cambodia’s economy in the post-EBA era
Op-Ed: East Asia Forum, 16 December 2019
Author: Pheakdey Heng, Enrich Institute
It has been yet another impressive year for Cambodia’s economy. Thanks to continued strength in traditional sectors such as garments, tourism, trade and construction, Cambodia’s GDP grew 7 per cent in 2019 — the highest growth in the ASEAN region according to the IMF.
While this impressive growth is a reason to celebrate, the possible withdrawal of the EU’s Everything But Arms (EBA) initiative may affect Cambodia’s growth prospects for 2020 and beyond. Established in 2001, the EBA gives Cambodia and 48 of the world’s poorest countries access to zero tariffs on all exports except arms and ammunition to the European Union on the condition that they comply with the principles of 15 United Nations and International Labour Organization conventions on core human and labour rights.
The European Union launched an EBA withdrawal procedure on 12 February 2019 after citing ‘a deterioration of democracy and respect for human rights’ in Cambodia. After a six-month monitoring and evaluation period, the EU Commission issued a report on the situation in November and gave the government a month to respond. Depending on developments in the country, the Commission will decide by February 2020 whether or not to suspend Cambodia’s EBA privileges fully or in part. A suspension would come into effect by August 2020.
EBA termination will be a big economic loss for Cambodia, currently the second-largest beneficiary of this trade privilege. Cambodia’s exports to the European Union last year totalled around US$5.8 billion — 95 per cent of which entered the European Union duty-free.
The textile industry will be hit the hardest. The EBA has fuelled an export boom that has kept the economy growing at a steady 7 per cent a year and helped to lift millions of people out of poverty. Suspending the EBA makes exports less competitive, putting workers at risk of losing jobs and dragging down economic growth overall. Around 2 million Cambodians depend on the textile industry, including 750,000 employees.
To help cushion the negative impact of the EBA withdrawal, the government is introducing measures to facilitate trade by lowering logistical costs, cutting red tape and supporting businesses with a six-day reduction in the number of public holidays to increase productivity.
Around US$3 billion is reserved for fiscal stimulus to cope with the potential slowdown. The government also plans to increase revenue raised from taxation, customs and excise by more than 20 per cent next year. The government collected some US$4.57 billion in revenue from customs and taxation in the first nine months of 2019.
While Cambodia is almost certain to miss out on growth potential, the EBA withdrawal is also an opportunity to implement deep reform to ensure sustainable growth over the long term.
Currently Cambodia’s main exports are garments and footwear, mostly to the European Union and the United States. But this industry is labour-intensive, has low levels of technology application and low value addition. Cambodia needs to transform its industrial structure from a labour-intensive sector to a technology-driven, knowledge-based modern industry if it wants to generate lasting growth.
The strategic approach is to promote the development of the manufacturing and agro-processing industries. Investment in these sectors is more sustainable than the low-wage garment industry. It can enable Cambodian workers to acquire higher skills, paving the way for higher value products and services and better integration into regional and global production chains.
To build economic resilience, Cambodia also needs to diversify its economic partners. Trade with China, Japan and South Korea has been on the rise and there is still room to grow. Cambodia and China are now discussing a free trade agreement. If successful, it sets a good precedent for bilateral FTAs with other countries.
Economic diversification and modernisation can only be achieved with the support of hard and soft infrastructure, a constructive policy and political environment and strong human capital. Investment is needed to improve the availability, reliability and affordability of energy, to develop a multimodal transport and logistics system and to strengthen the labour market through skill development. Political stability, good governance and sound regulation are also essential to attract foreign investment and technology transfer.Read More …
Op-Ed: Cambodia: Playing
the long game
against Hun Sen
European Union pressure
is working, and revoking
trade preferences might
allow Cambodians to
escape dynastic rule.
Cambodian Prime Minister Hun Sen at the Future of Asia Conference, Tokyo, 30 May 2019 (Photo: Tomohiro Ohsumi/Getty Images) Published 26 Nov 2019 12:30
To the casual observer, it may appear that Cambodian strongman Hun Sen is letting up, undoing some recent repression. This month, Hun Sen released Kem Sokha, the founder and co-leader of the main opposition party, after more than two years of house arrest, days later also ordering the release of more than 70 opposition activists arrested for “plotting to overthrow the government”.
These moderate relaxations are a direct response to European Union pressure, despite ruling party rhetoric suggesting the opposite. Since February 2019, the EU, citing “a deterioration of democracy [and] respect for human rights”, has been moving towards revoking Cambodia’s membership in the Everything But Arms (EBA) trade scheme, which allows the duty-free export of certain goods – textiles, footwear, and agricultural products – to Europe. The bloc will issue its final decision in February 2020. Cambodia, if removed, will experience what one analysis described as “a decline that could send the sector into free-fall and impact on the livelihoods of millions of Cambodians.” Meanwhile, the US Senate is considering a bill that would revoke Cambodia’s membership in Washington’s own preferential trade scheme.
Elders generally credit
Hun Sen with delivering
Cambodia from the
Khmer Rouge period,
but young people do
not feel as if they owe
him anything, instead
blaming him for the
state of the economy,
along with lagging
development and corruption.
Hun Sen is a skilled maneuverer, doing just enough over the years to satisfy the West, which in turn helps prop up Cambodia’s economy, imbuing him with some much-needed legitimacy. He has a long history of making short-term concessions, only to roll them back soon after, rather than implement any real change. This is perhaps best evidenced by his cynical treatment of Sokha, who despite being “free” is still banned from politics, and set to be put on trial for treason.
Western efforts have yet to bring about the peaceful, inclusive, and democratic Cambodia promised by the 1991 Paris Peace Accords. The US and Europe have struggled to counter Hun Sen effectively, instead seeking his cooperation on issues of mutual concern, hoping to keep Cambodia at least vaguely in the Western sphere of influence. But now, with Cambodia a codified one-party state deeply in China’s pocket – and Hun Sen lashing out against the EU – the West needs a new future-focused strategy, one that holds the Cambodian government accountable for human rights violations and other breaches. As a first step, Brussels and Washington should revoke their respective preferential trade statuses for Cambodia.Read More …