25 June 2021

Cambodia is an economy opened to international investments

Cambodia : an economy of the future, a pragmatic country open to international investment.

Bright economic prospects for Cambodia

It is a troubling time for most Cambodians living in the midst of this COVID-19 pandemic. As a law firm specializing in corporate matters, we were struggling to stay afloat as most of our clientele come from Foreign Direct Investment. Since Cambodia’s accession into the WTO in 2004, the country has embarked on an aggressive path of economic liberalization and became an active player in the regional and global trade scene. According to the World Bank, Cambodia has grown at a yearly average growth rate of 7.7% for two decades now, making it the sixth fastest-growing country in the world over that time period. Cambodia’s performance is impressive, because only a few countries in the world have experienced consistently high growth rates over several decades. The COVID-19 pandemic brought some temporary economic set back although the long term prospect of the country remains good, as per the International Monetary Fund’s recent assessment.

Up until 2019, Cambodia’s real economic growth rate has experienced approximately 7.5% annual growth rate driven by industries such as garments, manufacturing, construction, agro-industry and tourism. These industries are ripe for continued foreign direct investment opportunities, up until 2020 when the country was hardest hit by COVID-19. According to ADB, a sharp drop in orders from Europe and North America led to temporary shutdowns in one-third of Cambodia’s garment, footwear, and travel goods factories during the first half of 2020. However, increased production of bicycles and electronics pushed up Cambodia’s non-garment manufacturing exports by 30.3% year-on-year in the first half of 2020. Despite the worldwide economic downturn, Cambodia exported bicycles, electrical parts, vehicle parts and accessories, rice and other agricultural commodities to the tune of more than US$7 billion in the first half of 2020.

Cambodia is also diversifying its export capacity, which is key to its future as the country’s growth has been built on openness to trade. As concerns rise in Cambodia about the decline of exports to the EU due to the partial suspension of preferential access to the EU market under the ‘Everything but Arms’ agreement, new international trade and investment initiatives were brokered in an effort to spur post-COVID-19 economic recovery, in particular the Cambodia-China Free Trade Agreement and the Cambodia-ROK Free Trade Agreement. The newly signed Regional Comprehensive Economic Partnership (RCEP) is expected to offer a boost to regional economic confidence as well. Cambodia, as a low-cost country in this partnership, can expect increased employment opportunities as the RCEP Agreement allows production to be shared among member states, avoiding red tape and reducing costs and time for companies. The RCEP is expected to be a key contributor to reboot the country’s post COVID-19 economic growth, once it enters into force, with new FDI inflows to projects in non-garment industries and agriculture.  The recent military coup in Myanmar is also expected to lead to an investment diversion in favor of Cambodia. Other fundamental drivers in sustaining the growth rate include an improvement to infrastructure and logistics with the Government adopting its Interim Masterplan for Transport and Logistics to respond to a shift in regional value chains and market access. Digitalisation and innovation was the other significant driver as exemplified by a surge in e-commerce activities.

The continued development of the securities exchange and the financial sector promises to further facilitate the flow of capital within Cambodia. Cambodia is probably one of the most vibrant and open free-market economies as it is steadily embracing its integration into the ASEAN Economic Community (AEC) and the broader East Asia regional integration framework with the economies of China, Japan, South Korea, India, Australia and New Zealand, spurred by the recent signing of the RCEP.

Why Cambodia is not a proxy of China

Speaking of China, much has been said about the close partnership between Cambodia and China, and the risks of Cambodia’s overdependence on China. Some even accuse Cambodia of being client or vassal state of China. These accusations factor into a narrow mindset.

Yes, Cambodia is a small country, and China is a big country and a power asymmetry is obviously there. But independence and sovereignty are the foundations of nation-building in any country regardless of size and power. Cambodia is in fact pursuing an inclusive and multi-directional foreign policy. Deeping relationships with existing friends, making new friends and partners, and diversifying strategic partnerships are the key foreign policy strategies. Cambodia is not interested in putting all the eggs into one basket- it is too risky for a small state.

Hedging and diversification plus the enhancement of self-reliance and national resilience better protect Cambodia’s long-term national interests. So far Cambodia has signed strategic partnership agreements with China in 2010 and Japan in 2013. The Kingdom is exploring building strategic partnerships with other key partners such as Australia and the Republic of Korea where we have just entered into a free trade arrangement.

Cambodia is a strong proponent of open and inclusive multilateralism, believing that multilateral institutions and mechanisms would protect the interest and institutionalize the voices of small states. ASEAN in particular is regarded as a shield to protect Cambodia’s national interests. The recent conclusion and imminent entry into force of the RCEP is such a great example.

Looking at the big picture of Cambodia-China relations, we can draw three distinct characteristics. First, it is an equal relationship. Cambodia has never traded its national sovereignty for a favor or assistance from any country including China. China has never imposed its values or worldviews in Cambodia. Mutual respect has been practiced and adhered to.

Second, it is a win-win relationship. Indeed, the re-emergence of China provides huge opportunities for Cambodia. Mutual interest has been the binding factor in our relationship. For Cambodia, economic interest comes first as the Kingdom has prioritized its economic diplomacy. How to transform the international environment into a source a national development and poverty reduction has been one of the Kingdom’s foreign policy objectives. China is an emerging economic power that every country wishes to build good relationship with. If China is pouring billions into building our much-needed infrastructure that would enable us to compete in attracting quality FDI, why should we say no. By far, the Cambodia-China relations is nowhere near exclusive. We are a very open and most liberal economy and all investors are welcome. China, the European Union and the United States are the three main locomotives in driving Cambodia’s future growth, both in terms of production and market access. Therefore, by working closely with all three global economic powers, Cambodia’s future will be bright and resilient.

First published at https://www.opinion-internationale.com/ on 22 June 2021.