Cambodia: (Preăh Réachéa Anachâk Kâmpŭchea) An Assessment of Development Potential

What is Cambodia’s Development Potential?

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What is Cambodia’s Development Potential?

After examining our four factors of development (political development, economic measures, education, and health) we have come to the conclusion that Cambodian people lack basic human needs as well as social and economic opportunity. When compared to neighboring countries in Southeast Asia, Cambodia lags behind is almost every respect. Despite progress in election participation and integrity, Cambodia’s government is still plagued with corruption, which impedes on political and social opportunities. Although Cambodia’s GDP per capita PPP has doubled over the past ten years, it is still the lowest of all its neighbors to which we have compared it. In terms of education, Cambodia has an extremely large gender disparity in all levels of schooling when compared to Laos, Vietnam, and Thailand. While Cambodia has made recent improvements in life expectancy and infant mortality, significant disparities still exist based in income, wealth, and geographic location. After examining these areas of underdevelopment, we are now able to look toward creating a sustainable project to address the most vital of these concerns.

While Cambodia is underdeveloped in all of the aforementioned areas, we feel the most pressing issue is the lack of adequate healthcare. Health is a basic human need and is the foundation for human potential. The areas of income, education, and political freedoms cannot begin to be developed without a healthy and nourished population. According to Shimider, “Denied [vital nutrients] in the womb and in infancy, children suffer irreversible brain and nervous system damage, even if they appear well-fed” (Wines). Adequate healthcare allows students to receive the most benefit from their education. With a proper education, students will then be able to obtain better jobs and therefore a higher income. By raising the overall standard of living, Cambodians can then concentrate on securing political freedoms and voicing their own concerns. Development is a chain reaction; the establishment of proper healthcare will lay the groundwork for future development in other areas.

Project Proposal

Cambodia’s alarming maternal death rate, along with our prioritization of health care as the foundation for sustainable development, has led us to focus on a project that will increase the number of certified midwives in Cambodia. According to the Cambodia’s National Maternal Child Health Center, there were 370,000 births but only 3,300 trained midwives in Cambodia in 2009. As described earlier, Cambodia is in dire need of trained birth attendants, particularly in rural areas.

We feel that midwives are the most promising weapon in combating maternal death rates. When trained properly, midwives can provide the life-saving health services to Cambodian women while breaking down cultural reservations normally associated with hospitals and other forms of healthcare providers. The Ministry of Health notes that, “Traditional beliefs that negatively influence delivery practices, health seeking behavior, and child feeding practices remain prevalent across the country, more so in rural areas and in families with low and very low income” (Cambodia Ministry of Planning). Keeping this information in mind, our project will aim to increase the availability of midwife services to rural women in Cambodia, who are often unaware of the benefits of midwives or unable to access them due to transportation issues.

Our proposal recommends the building of a women’s center in a rural village (Location TBD) that would serve to train new primary/secondary midwives, retrain current midwives, provide information to young local women of university/government midwife programs, and serve as a community resource for local women who need advice or assistance in the areas of pregnancy, antenatal care, and family planning. This project would be very cost-effective and sustainable, because it would require limited training materials and rely on experienced midwives to train new and lesser experienced women in their local community. The community center would provide a preferential option for poor families and help to build social capital in a country still recovering from the aftermath of the Khmer Rouge. By addressing this unmet health need, we hope to eliminate barriers to maternal health care and ensure that each woman has the resources for a safe and healthy pregnancy.


1-Gap Analysis

The following analysis examines the role that investment has had on Cambodia’s economic growth. Using the Harrod-Domar equation, we will look at investment and domestic savings levels to assess whether Cambodia’s investment levels are adequate to meet target growth rates and determine whether the 1-gap is a significant barrier to development goals.

The Harrod-Domar model is a simple equation that relates GDP growth and investment. It is defined as ΔGDP = (1/k)*I, with ΔGDP as annual percentage of GDP growth, k as the expected output from any investment, and I as gross fixed capital formation as a percentage of GDP. For comparative purposes, our team looked at corresponding data for other countries, including neighboring Southeast Asian countries (Laos, Thailand, Vietnam) and a country with similar GDP growth (China). All values were obtained from the period 1994-2007 and are contained in Figure 6.

Figure 6: Harrod-Domar Variables, 1994-2007


GDP growth (annual %)

Gross fixed capital formation

(% of GDP)

K (GFCF/GDP growth)

Gross domestic savings

(% GDP)


























Source: World Development Indicators, 2009

As shown in Figure 6, Cambodia experienced high GDP growth, which was surpassed only by China in our country comparison. Since Cambodia’s current growth rate is already so high, we believe it is a realistic and acceptable target growth rate for the future. To maintain this rate of GDP growth, investment should remain at 16%, according to the Harrod-Domar equation. However, from 1994-2007, Cambodia’s domestic savings rate was only 6%. The 1-GAP (i.e., desired investment minus available domestic savings) was therefore 10%. For growth to continue at 9%, this means that Cambodia will require external financing for 10% of its investment.

Figure 7 illustrates the relationship between GDP growth and investment for Cambodia, our comparison countries, and country aggregates by wealth (HIC, HIPC, LDC, LIC). As shown, Cambodia achieved comparably higher GDP growth than every wealth aggregate and almost every other country, despite having the lowest investment levels. Given its relatively low k value of 1.98, Cambodia appears to demonstrate high returns on investment (See Figure 6). Although China has shown slightly higher GDP growth, its investment was over double that of Cambodia’s. In other words, China has been able to achieve higher GDP growth than Cambodia, but only through higher investment levels.

Figure 7: GDP growth vs. investment, 1994-2007


HIC = High Income Countries

HIPC = Heavily Indebted Poor Countries

LDC = Least developed Countries

LIC = Low Income Countries

Source: World Development Indicators, 2009

Figure 8 illustrates Cambodia’s investment and savings levels from 1994-2007. During this period, gross domestic savings has been consistently lower than gross fixed capital formation, which means that most of its desired investment has come through foreign capital and external financing.

Figure 8: Investment and domestic savings levels, 1994-2007

Source: World Development Indicators, 2009

To maintain current growth rates, we believe that Cambodia will continue to require external finance. However, the Cambodian government should be cautious against fostering a dependence on foreign capital. As Paul Krugman has written, sustainable economic growth is only possible when increased investment is accompanied by greater efficiency (Krugman). Although current investment patterns have been sufficient to achieve high GDP growth, Cambodians will need to increase saving and invest efficiently in order to achieve long-term growth.

That said, we would like to acknowledge the fact that this 1-gap analysis has focused only on economic growth and is unable to acknowledge the broad, complex dimensions of poverty and human development that we are interested in. While Cambodia may have experienced high GDP growth in recent years, it continues to fare poorly in the areas of health, education, and political rights. While the Harrod-Domar model provides useful insight into a nation’s macroeconomic performance, it must only be considered in association with other areas of development.

2-Gap Analysis

The two gap is the difference between a country’s available hard currency and actual sources of foreign exchange. Although our focus remains on social aspects of development, we acknowledge that the health of a country’s economy determines the success of programs aimed at sustainability. The 2-gap involves an analysis of balance of payments, currency, and liabilities. Specifically in the components of balance of payment accounting that we will focus on include: current account balance (includes trade balances, net factor payments, and transfers), the capital account (includes foreign direct investment), financing items (includes reserve assets, debt).

In terms of trade, Cambodia runs a deficit that has continued to increase in the past five years. As of 2008, Cambodia’s exports were 42.9% of GDP and its imports were 59.5% of GDP. The current trade deficit (the difference between exports and imports) was -1.239 billion dollars, which is 16.6% of GDP. Using 18% of GDP as a benchmark for an unsustainable level of deficit, Cambodia’s 15% of GDP deficit is by no means sustainable. Cambodia exports clothing, timber, rubber, rice, fish, tobacco, and footwear. As for imports, Cambodia brings in petroleum, cigarettes, gold, construction materials, machinery, motor vehicles, and pharmaceutical products.16 We reviewed the exports and imports in order to determine what Cambodia could expand upon domestically in order to reduce the trade deficit and further stabilize the Riel. Two major industries that we believe can have an impact on the deficit are petroleum and tobacco. Cambodia’s recent discovery of oil reserves and natural gas hold great promise for revenue and economic growth. “Cambodia’s annual oil revenue should begin at about 174 million dollars in 2011 and climb to about 1.7 billion by 2021…”17 Therefore Cambodia should decrease its petroleum imports and focus on this newfound industry, which also holds great promise for attracting foreign direct investment. In addition, this large of an increase in revenue would allow Cambodia to eliminate its trade deficit. As for the tobacco industry, instead of importing cigarettes from abroad, Cambodia should begin to look for ways to develop its own processing plants to supply domestic cigarettes to its population. This would limit imports and ultimately decrease the trade deficit.

As seen in the chart below, Cambodia continues to import more goods and services than they export, leaving them a negative resource balance. This number has continued to increase over the past decade, with the current resource balance at -$1.239 billion (2008). In addition, Cambodia's net income and current account balance is also in the red and has continued to increase over the years. The current account balance is especially alarming, as it has doubled within one year from 2007-2008. 18

Figure 9- Balance of Payments

Balance of Payments

(in U.S. Millions of $)




Exports of goods and services




Imports of goods and services




Resource Balance




Net Income




Net Current Transfers




Current Account Balance




Finance Items19




Changes in Net Reserves




Cambodia’s Riel was first issued in 1955 and is a floating currency. After the overthrow of Khmer Rouge, the Riel was reissued in 1980. As seen in the figure below, during years of 1990-1993, the value of the Riel dramatically decreased.

Figure 10- Exchange Rate, 1994-2004
Source: World Development Indicators
This trend continued at a less drastic rate until 1998, when the Riel finally began to stabilize. For the past ten years, the Riel has been relatively stable, only depreciating at small increments annually with very little to no volatility. This stability is largely connected with the Cambodian government’s commitment to currency stability.

“Exchange market intervention by the central bank to limit depreciation of the domestic currency and maintain the Riel around 4100 per U.S. dollar has slowed growth in foreign exchange reserves this year. Still, reserves rose modestly from a year earlier to 2.2 billion dollars by the end of June 2009. Cambodia’s real effective exchange rate appreciated to 2-3% in June 2009 from a year earlier. Prices are down 4.9% in June from a year before, reflecting the sharp downward correction in food and fuel prices. Upward pressures on inflation might reemerge as international prices of commodities rebound and depreciation pressures continue. In addition to the Riel, the U.S. dollar is widely used in Cambodia with little difficulty.”20

As of 2007 in the East Asia and Pacific region Cambodia was the 3rd largest recipient of US foreign aid, borrowing $62 million for a wide range of issues, the majority being directed toward health programs. In terms of debt, the external debt in 2008 as a percentage of GDP is 34.821, while the total outstanding debt is $3.76 billion22. This is a vast improvement from previous years in which debt levels had risen to 165% of GNI23. One-third of Cambodia’s public debt is owed to Russia and the United States; the latter's debt stems from shipments of agricultural commodities such as cotton and rice.24 “According to the World Bank and the IMF, Cambodia’s debt is on a sustainable path and the risk of debt distress is judged ‘moderate,’ an improvement from the 2006 assessment that Cambodia’s risk was ‘high,’ thanks to higher-than-expected GDP growth and additional large-scale concessional financing from creditors such as China and South Korea.”

As Cambodia’s economy and currency is becoming more stable, the country has become much more attractive for Foreign Direct Investment. According to the World Bank, in 2008 Cambodia received $ 815 million in Foreign Direct Investment. Although this is down from 2007’s FDI level of $866 million, FDI flows to Cambodia have dramatically increased over the past few years, as they were only $121 million in 2004.25 From 1994-2004, almost 50% of Cambodia’s FDI comes from the ASEAN countries, with Malaysia accounting for 36.7% of total FDI inflow.26 Greater China (PRC, Taiwan, Hong Kong) accounts for the next largest source of FDI inflows into Cambodia at 26.7%, followed by the United States and the European Union. Manufacturing-related foreign direct investment accounts for a large portion of total FDI with wood and wood products accounting for over 20% of total foreign direct investment and garment-related FDI constituting almost 25% if total FDI inflows.

Although large amounts of FDI do mean capital outflows in the future, Cambodia can and should expand Foreign Direct Investment at this point in time. There are continuing opportunities in the garment industry and new opportunities especially in oil and minerals. Cambodia’s recent discovery of oil reserves has already prompted some investment by international companies, many Chinese ones in particular. If the government is smart about this opportunity and does not allow the profits to only benefit a few wealthy elites, foreign direct investment in the oil industry could really benefit the country.

As the Riel has begun to stabilize, Cambodia has made a slight improvement in closing the 2-gap over the past few years. While currently the debt levels are manageable, external finance, even though it is needed to close the 1-gap, should not be tolerated for an extended period of time because it would halt or possibly reverse the progress Cambodia has and is projected to continue to make in the future. There is no real way for such an underdeveloped country to avoid external finance and with a deficit that is at the moment unsustainable what Cambodia really needs to concentrate on is both lowering their import levels on products which could potentially be produced at home and raising their export levels by investing in areas such as agriculture to increase efficiency. While Cambodia has made some progress towards improving its financial health there is still a long way to go. Although we recognize that the presence of a 2-gap is not necessarily beneficial, to achieve our definition of sustainable development we do not see any need to suggest a policy proposal to address this issue and feel that Cambodia will continue down a path of decreasing its 2-gap.

3-Gap Analysis

The 3-gap is defined as the difference between required government expenditures and available government revenues. In 2008, Cambodia’s government expenditures totaled $1.6 billion, with total revenue reaching $1.3 billion.27 Based on these values, the 3-gap was therefore a budget deficit of -$0.3 billion, or -0.7% of GDP.

Figure 11: Revenues, Expenditures, and Budgetary Surplus/Deficit


As shown in Figure 11, Cambodia has routinely run budget deficits like this throughout the past two decades. While budget deficits have been as large as -7.5% of GDP in 1995, the gap between government revenues and expenditures has narrowed in recent years. This is a positive observation that suggests that Cambodia’s debt has been manageable and revenue has begun to catch up with recent economic growth.

There are several possible reasons why Cambodia has encountered budget deficits. First, revenues may be low because tax administration and collection is poor in Cambodia, and the economy is largely dependent on informal sectors such as agriculture, which are untaxed. Each year, smuggling in Cambodia robs the government of large amounts of revenue. For example, beer, which is smuggled in from Thailand and Singapore into Cambodia, is estimated to cost the government $22 million in lost tax revenue (ABC News).

As Figure 12 illustrates, Cambodia’s revenue making capabilities are poor. In 2005, Cambodia’s government revenues were less than 11% of GDP, placing Cambodia as the lowest among rated sovereigns in the Asia-Pacific region (Dean and Joiner). According to Standard & Poor’s credit rating system,28 Cambodia has a sovereign debt rating of B+, placing it in a similar range as Sri Lanka and Pakistan but below that of its neighbors Thailand and Vietnam. Cambodia’s credit rating indicates that its outlook is stable. To improve its credit rating, Cambodia must reduce barriers to investment and improve government revenue raising capabilities.

Figure 12


Original source: Standard & Poor’s, National Institute of Statistics of Cambodia, IMF

Taken from:

Figures 13 and Figure 14 look at specific sources of revenue and expenditures in Cambodia. In 2008, revenue was derived primarily from taxes (71%) and grants (28%), and the greatest expenditures were made on defense (21.7%), general public services (18.5%), education (13.9%), and health (10.3%). Cambodia’s reliance on foreign aid as a source of revenue is problematic. Each year, Cambodia receives an average of $600 million dollars, or half of its national budget, from foreign donors. Moreover, about one-third of Cambodia’s public spending is financed by aid. This reliance on foreign aid has contributed to Cambodia’s national debt and is likely to be unsustainable.

Currently, military expenditures make up over one-fifth of total government expenditures. We feel that the Cambodian people would benefit greatly if the government could decrease military spending and reallocate these resources towards education and health services instead. Thailand, a country similar to the size of Cambodia, currently allots 25% of their government expenditures to education alone and boasts better health and educational outcomes than Cambodia. If the same prioritization were to be given to health and education in Cambodia, we believe the welfare of its population would greatly increase.

Figure 13


Figure 14


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