Economy: Can Cambodia match South Korea to become a high-income economy by 2050?

The World Bank has outlined four reform priorities to help Cambodia transition to more productive growth that can achieve high-income status by 2050 — as South Korea did over 25 years in the late 20th century.

Phnom Penh. Photo CG

“Productivity growth has not been a major driver of growth historically,” the bank says in its annual Cambodia Economic Update released last week.

“Cambodia’s levels of labour productivity are very low compared to its peers across all sectors of the economy.”

LOW PRODUCTIVITY COMPARED TO VIETNAM AND THE PHILIPPINES

In 2023, for example, 39 percent of Cambodian firms surveyed cited an “inadequately educated workforce” as an obstacle to business.

This may be an improvement from 49 percent in 2016 but Cambodia ranked lower than the Philippines (44 percent) and Vietnam (43 percent).

"Cambodia will need to significantly improve its productivity performance in the coming decades to sustain high rates of economic growth and realise its vision of rapidly becoming a high-income country,” the bank says.

To achieve this, Cambodia — currently ranked as a lower middle-income country — will have to boost income per capita to around US$13,800, a six-fold increase from around US$2,200 today.

That means avoiding the “middle-income trap” — when GDP per capita gets stuck at the middle-income level and does not develop further.

In a separate report in August, the World Bank warned that more than 100 countries—including China, India, Brazil, and South Africa—face serious obstacles that could hinder their efforts to become high-income countries over the next few decades.

SOUTH KOREA’S MIRACLE ON THE HAN RIVER

To avoid the middle-income trap, the bank says Cambodia will “likely” have to match the rapid post-war growth of South Korea, often referred to as the Miracle on the Han River.

In 1968, it recalls, South Korea was at the same level of development as Cambodia is now. Over the next 25 years, the bank says, growth in the country’s total factor productivity — its ability to generate more income from fewer inputs— was 2.2 percent a year.

The rate in South Korea — which the World Bank calls a “growth superstar” — was almost twice as high as Cambodia’s average of 1.3 percent between 2000 and 2019.

For Cambodia, the bank says, better performance requires moving towards higher value-added products, value-chains and activities while addressing specific structural barriers and disincentives faced by some firms.

At the same time, Cambodian firms also need incentives to modernise, digitalise and internationalise their operations more rapidly as well as measures to address obstacles to doing business.

HIGHER VALUE-ADDED

The bank says Cambodia should move toward higher value-added activities — both within sectors and to more productive industries — as well as from rural to urban areas.

"This is aligned with a broader need to pursue greater economic diversification in Cambodia to reduce the risks associated with the high concentration of products and markets,” it says.

Possible measures include making it easier for new firms to open and for weak ones to close, encouraging new industries and making existing ones more value-added.

STRUCTURAL BARRIERS AND DISINCENTIVES

The bank finds lower productivity among Cambodian firms that are medium-sized and located in mountainous regions — and, to a lesser extent, those around the Tonle Sap. These firms also seem to face a more challenging business environment.

Moreover, frontier firms — the top 10 percent in terms of labour productivity — “are lagging far behind their regional peers and operating significantly below the regional productivity frontier.”

The bank recommends greater government support to help medium-sized firms navigate obstacles and build capabilities, along with targeted infrastructure investment and government programmes for service extension in rural areas.

It also suggests reforms to increase competition — especially in the services and digital sectors — and incentives for frontier firms to invest in advanced technologies, skills development and global networks.

DIGITALISATION, MODERNISATION AND INTERNATIONALISATION

The bank notes higher labour productivity among Cambodian firms with more modern personnel practices. These include firms that have independent managers who aren’t owners and formal employee-training programmes.

In these two areas, productivity — as measured by the average improvement in value-added per employee — is 20 percent higher for firms with independent managers and 29 percent higher for those with training programmes.

At the same time, firms that leverage technology — by having a website or using electronic payments, for example — are also found to be more productive, along with export-oriented firms.

Productivity increases 5 percent for Cambodian firms with websites and 29 percent for those oriented towards export markets.

To help firms access new markets, the bank highlights the importance of addressing infrastructure barriers to trade, reducing customs-clearance times and improving services.

OBSTACLES TO DOING BUSINESS

According to the bank, the most pressing needs to address obstacles to doing business include ensuring that the benefits of registering firms outweigh the costs — especially for small firms — by reducing registration costs and enhancing the associated advantages.

Cambodia also needs to enhance transport and logistics infrastructure, improve investment in skills and the uptake of modern financial instruments among more sophisticated firms, and streamline its “cumbersome and costly” tax regime.

To reduce corruption and informal payments — especially in tax administration — the bank recommends investing in detection, increasing penalties and digitising processes.

Other improvements are recommended for the judicial system, such as setting up specialised commercial courts, and increasing transparency and digitalisation.

Finally, the bank highlights the need for better government services related to business authorisations — including by fully digitising the business registration portal and introducing and implementing risk-based approaches to licensing.