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Cambodia Sustaining Strong Growth for the Benefit of All a Systematic Country Diagnostic Public Disclosure Authorized

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Cambodia Sustaining Strong Growth for the Benefit of All a Systematic Country Diagnostic Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CAMBODIA SUSTAINING STRONG GROWTH FOR THE BENEFIT OF ALL A Systematic Country Diagnostic Public Disclosure Authorized Report No. 115189-KH This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Attribution Please cite the work as follows: World Bank. 2017. Cambodia - Sustaining strong growth for the benefit of all. Washington, D.C. : World Bank Group. https://hubs.worldbank.org/docs/imagebank/pages/docprofile.aspx?nodeid=27520556 Rights and permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/ The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, USA Telephone: 978-750-8400 Fax: 978-750-4470 http: //www.copyright.com/ All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank. 1818 H Street NW Washington, DC 20433, USA Fax: 202-522-2422 E-mail: [email protected] Photographs: Cover: small1’s/Shutterstock, Chapter2: Yongyuan Dai/iStock Interior design: Florencia Micheltorena, Buenos Aires, Argentina. CAMBODIA SUSTAINING STRONG GROWTH FOR THE BENEFIT OF ALL A Systematic Country Diagnostic Contents Abbreviations 8 Acknowledgements 10 Executive Summary 12 1. Introduction 22 2. Context: Cambodia’s development trajectory 28 Cambodia, from conflict to success as a highly open export-oriented economy… 28 … with persistent governance challenges… 30 … and a large rural population that still depends on agriculture and remains vulnerable 31 3. What have been the drivers of stellar growth and poverty reduction performance in Cambodia? 36 3.1. Success in poverty reduction thanks to job creation and a windfall from higher agricultural commodity prices 36 Cambodia has been one of the leading countries in poverty reduction and shared prosperity 36 The drivers of poverty reduction have been low-skilled urban job creation and agricultural expansion 40 3.2. Cambodia’s main engines of growth to date: export-led growth linked to basic human and natural resources 43 Cambodia has enjoyed blistering growth in labor-intensive exports of goods and services 43 Workforce expansion has been driving economic growth in Cambodia, while labor productivity gains have been more modest than in other fast-growing countries 45 The levels of capital accumulation and savings have been lower than in other economies experiencing sustained fast growth 47 4. What are the challenges Cambodia faces in sustaining strong growth and improving equity outcomes over the next decade? 52 Going forward, increased human and physical capital are needed for Cambodia to reap the demographic dividend and reach upper middle-income status 52 4.1. Challenges to economic diversification 54 Declining external competitiveness and erosion in preferential treatment challenge exports 56 Informal competition and fees challenge the creation of a vibrant private sector 62 The available skills are unlikely to meet the upcoming needs of firms 68 4.2. Constraints to household economic mobility 72 Beyond extreme poverty, socioeconomic mobility has been limited 72 Limited access to education and land inhibits socioeconomic mobility 73 Persistent malnutrition affects learning outcomes and human capital formation 75 Exposure to health and environmental shocks compounds challenges to achieving socioeconomic mobility 78 Challenges in public service delivery affect human development outcomes 79 5. Is the current development model sustainable? 86 5.1. Risks to the sustainability of macroeconomics and public finances 86 Although public finances remain sustainable, maintaining public investment levels will become more challenging 86 Macro-financial vulnerabilities are rising due to a credit boom 89 5.2. Risks to social sustainability 94 Although a large number of women joined the workforce over the past two decades, significant gender gaps still exist 94 Some groups in Cambodia still experience exclusion and discrimination, heightening their vulnerability 97 While progress has been made, land disputes and displacement remain an issue in Cambodia 99 5.3. Risks and opportunities for environmentally sustainable and resilient development 100 Unsustainable economic activities are associated with a degradation of natural capital, increasingly endangering their contribution to the economy and poverty reduction 100 Climate and disaster risks compound environmental sustainability challenges 102 Poorly planned urban development heightens risks and may constrain growth 104 Sustainable growth is faced with tradeoffs for competing demands on natural capital 106 6. Priority interventions to encourage strong, inclusive, and sustainable development in Cambodia 110 6.1. Determining areas for development and priority interventions 110 Constraints to economic growth 115 Constraints to accumulation of household assets 118 6.2. Pathway 1: Increasing economic competitiveness and diversification to sustain strong growth and create jobs 123 Reducing the costs of firm establishment and operation, including electricity costs and trade transaction costs 123 Boosting public and private investment in infrastructure and machinery acquisition while developing capital markets 125 Strengthening regulation and supervision of the financial sector to mitigate risks from strong credit growth, while building further financial inclusion 127 Fostering agricultural modernization in the aftermath of the commodity price boom 129 6.3. Pathway 2: Building human assets to facilitate economic mobility and shared prosperity 131 Endowing people with skills by boosting attainment and learning outcomes of secondary and higher education 131 Investing in the early years 135 Protecting households from shocks 136 6.4. Pathway 3: Ensuring a sustainable growth pattern by investing in natural capital, climate resilience, and sustainable urban development 138 Maintaining and developing natural capital, while strengthening climate resilience 139 Promoting competitive, sustainable, and inclusive cities through integrated urban planning 142 6.5. Cross-cutting: Public administration and public financial management reforms for improved service delivery 143 6.6. Data constraints and identified knowledge gaps 146 7. References 149 Annexes 1. Benchmarking Cambodia’s Development 160 2. Insights into poverty measurement in Cambodia 165 3. Using Cluster analysis to inform prioritization in Cambodia 168 4. Cambodia SCD engagement with stakeholders 170 List of tables 1. Cambodia SCD team members 11 2. Cambodia SCD pathways and identified priority areas for development 18 3. Cambodia’s scores on LDC graduation criteria 23 4. Nearly all types of households and areas experienced a reduction in poverty in 2007-14 39 5. The agricultural sector has experienced rapid land-use expansion and growth in yields 48 6. Rural land ownership and land sizes have been decreasing in recent years 73 7. Public sector wage bill for selected country groups, latest available year 87 8. Top areas for development from individual questionnaires and meeting discussions 111 9. Cambodia SCD pathways and identified priority areas for development 113 10. Classification of households by endowments, livelihood, and vulnerability (2013) 120 11. Education determines avenues to better prosperity 121 12. Pathway 1: policy options to increasing economic competitiveness and diversification 124 13. Pathway 2: policy options to building human assets 132 14. Pathway 3: policy options to investing in natural capital, climate resilience, and sustainable urban development 140 15. Cross cutting: policy options to improving public service delivery 144 16. Benchmarking Cambodia’s Development in a snapshot 160 17. Cambodia’s progress towards the Millennium Development Goals 163 18. Top areas for development from individual questionnaires and meeting discussions 172 List of figures 1. Cambodia still lags behind on some dimensions of economic competitiveness 14 2. Cambodia rates relatively low on certain governance indicators 31 3. Cambodia stands out in agriculture value-added and rural population 32 4. Cambodia has achieved impressive progress in poverty reduction over the past decade 37 5. Household ownership of assets and housing amenities have improved significantly 37 6. Growth became pro-poor after 2007, in the context of high agricultural commodity prices 38 7. Cambodia still
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