Hun Sen Reaches for Ambitious Income Target

Going by the World Bank’s method of grouping nation states by their wealth, Cambodia this year could become a lower-middle income country.

Not satisfied, however, with this graduation—a feat in itself from Cambodia’s position of ex­treme poverty just two decades ago when gross domestic product (GDP) per capita was $240—the government is already eyeing the next milestone.

As Prime Minister Hun Sen embarked on a visit to China this month to drum up aid and soft loans for infrastructure projects, he gave a rare interview to Chi­nese state news agency Xinhua declaring his vision to move Cambodia into upper-middle income status by 2030.

“This year, Cambodia will move forward from a low-income country to a lower-middle income country,” Mr. Hun Sen was quoted as saying.

At the end of 2012, the country’s per capita GDP amounted to about $970, Ministry of Economy and Finance Secretary of State Hang Chuon Naron said last week, putting it in the below-$1,025 bracket that the World Bank classifies as “low-income.”

But with economists predicting that growth this year will be above 7 percent, Cambodia should edge over the $1,025 GDP per capita that defines lower-middle income countries, which include Laos, Indonesia and the Philippines.

If this happens, Cambodia could gain membership to the International Bank for Reconstruction and Development, a branch of the World Bank, and give the government access to more capital. As a low-income country, Cam­bodia has only had access to concessional loans from the World Bank’s International Development Association.

But reaching Mr. Hun Sen’s goal of becoming an upper-middle income country—a group that currently includes Thailand, Malaysia and China—is a bigger task. The World Bank’s current threshold for upper-middle income countries is a per capita GDP of more than $4,036. Economists are also questioning how equitably the wealth created in the coming years will be shared.

Government estimates predict that by 2030, Cambodia’s population will have reached 18.4 million, meaning that to achieve an upper-middle income GDP per capita, the total size of the economy would need to top $74 billion.

This would mean the economy multiplying more than five times in 18 years—from its 2012 size of $14.25 billion—and would require GDP growth of more than 9.5 percent annually over the period.

According to ADB senior country economist Peter Brimble, the average GDP growth over the past 20 years has been 8.1 percent. But reaching any higher than even that will be a difficult task.

“Is it likely to be able to grow at 8.5 percent? Probably a real challenge,” Mr. Brimble said.

Still, he said there were some signs that Cambodia could get close to becoming an upper-middle income country by 2030.

“It’s interesting to note that the companies that are investing here are the same companies, the same name companies, making the same products that moved to Thailand in the late 1980s to early 1990s,” Mr. Brimble said. He cited Minebea Co. Ltd., which has opened a precision motor factory in the Phnom Penh Special Economic Zone (SEZ), the Denso Corporation, which in January announced that it would set up a motorcycle parts factory in the same zone, and Hana Microelectronics, which is opening a plant in Koh Kong’s SEZ.

“These are the same companies that set up in Thailand, so you can see something happening,” he said.

Despite interest from large firms looking to expand manufacturing here beyond cheap garments, nobody really believes that Cambodia will be able to reach upper-middle income status by 2030.

Even by the calculations of the Cambodia Development Research Institute (CDRI)—a leading economic think tank, which has considerable influence over government policy—Cambodia’s 2030 GDP per capita will stand at $3,182, nearly $1,000 short of upper-middle income status.

In a new paper, which is still to be published, CDRI estimates that Cambodia’s economy could grow at an annual rate of 8.5 percent over the next 20 years.

“[W]e are convinced that Cambodia could achieve the average annual growth of around 8.5 percent during the next two decades, making GDP to expand by about 5.2 times and per capita GDP by approximately 4.2 times between 2010 and 2030,” the report states.

Still, even with such high levels of growth, CDRI warned that more attention should focus on narrowing the gap between rich and poor.

“Further progress in poverty reduction will require a policy focus on more inclusive growth, significantly increased public investment in rural infrastructure, energy generation and distribution, especially to rural and remote areas, higher quality education and health care,” the paper sates.

“Cambodia is also unlikely to sustain growth in the long-term if it continues to rely on the current drivers of growth,” it says, referring to the low-tech production of garments.

The report also found that the country’s Gini coefficient—a number between zero and one, where zero corresponds to absolute equality—rose from 0.39 in 2004 to 0.43 in 2007. However, by 2011 it had fallen again to 0.36, meaning that Cambodia is becoming more equal.

CDRI highlighted the need for investment in infrastructure and human resources to make Cambodia more competitive with other countries and attract new industries.

Potentially game-changing developments, like the emergence of an oil and gas or mining sector, would create their own risks, CDRI says.

“State institutions and human resource capabilities will have to be strengthened. Governance of the oil and gas sectors, for example, requires high technical expertise across different areas,” it says. “Institutional arrangements need to be well-developed to minimize rent-seeking and ensure effectiveness and transparency.”

Despite these challenges, the Finance Ministry’s Mr. Chuon Naron said he was hopeful.

“I think moving from $1,000 to $4,000 [per capita GDP] is possible,” he said, assuming favorable conditions beyond Cambodia’s borders. “I think we have to look at global growth, global development, in the world economy.”

He said regional diplomacy involving China, the U.S. and Japan would also be a major factor. Strain on the relationship between China and Japan due to territorial disputes had already contributed to growing Japanese investment in Cambodia, he said.

“How that power play would be evolving in the next decade is also very important because Cambodia would produce more commodities, more manufacturing products for export,” Mr. Chuon Naron said.

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