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Monday, December 22, 2014 Source - Bangkok Post

 

By Wanant Kerdchuen  in Phnom Penh

Cambodia expects to be a big winner when the AEC is formed but it knows it will need more           than just cheap labour as a selling point.

Still in the early stages of its development as a capitalist economy, Cambodia has much more room to grow. The direction that growth should take is still being debated, but the country is widely expected to be one of the bigger beneficiaries of Asean integration starting next year.

A young population and low labour costs have persuaded many businesses to relocate production from the likes of higher-cost China and Thailand. Phnom Penh also offers one of the most investor-friendly regimes in Asia, but beyond cheap labour, the list of advantages is a short one. Infrastructure is still weak in many areas and electricity supply can be unreliable. Skill levels are low and businesses can expect to invest a lot in basic training.

However, the country's appeal is expected to grow as it pushes ahead with infrastructure work, educational reform and other improvements, and as the middle-income population expands and lifestyles change.

The government has also committed to reform, upgrade and clarify its laws in the hope of attracting more foreign direct investment (FDI).

With ample development potential, Cambodia will maintain a pro-growth attitude and modernise the industrial sector to underpin the new era of investment, Prime Minister Hun Sen has stated.

"Cambodia will be able to sustain 7% GDP growth per year once the Asean Economic Community (AEC) becomes a reality at the end of 2015," the prime minister said during a recent talk in the capital.

The Cambodian economy grew by an annual average of 6.7% per year from 2006-09 and has averaged 7% a year since then. Growth this year is estimated at 7.2%, thanks to the contribution of the garment, construction and service sectors, and should reach 7.5% next year, according to the World Bank.

Hun Sen has also acknowledged that his country needs to promote new sectors that use modern technology, instead of relying solely on labour-intensive activities such as garment production, tourism, construction and agriculture.

Left in ruins three decades ago by the Khmer Rouge, Cambodia has made remarkable strides to rebuild itself as a modern economy. A rising urban population and a new consumer class is another draw for businesses.

"It could be that more industries will be coming such as electronics and home appliances which are increasingly needed in Cambodia," said Van Sou Ieng, chairman of the Garment Manufacturers Association in Cambodia (GMAC).

"I could say Cambodia is less developed, but there are opportunities. If there is a lack of something, there is an opportunity to create. The opportunities in Cambodia are huge compared to other countries because everything is missing and everything is needed."

Once the AEC is formed, the government expects more production, industrial and service industries to move to Cambodia from Thailand and Vietnam.

"GDP in countries like Thailand and Vietnam is much higher than in Cambodia. Therefore, once the AEC opens, you will see the natural flow, like water from a high level to a low level. That will be the natural course of businesses," said Van Sou Ieng.

After integration, Cambodia will no longer be serving only a domestic market of 15 million people, but could play a significant role to supply the 600 million population of the entire Asean region.

"Research says that Cambodia can actually feed 35 million people. Now we only have 15 million so we can feed and accommodate double the size of our existing population," the GMAC chairman said.

However, the country's perceived advantages need to be managed well in order to create sustainable economic growth, says Grant Knuckey, the CEO of ANZ Royal Bank.

"It has a positive demographic profile, geographic proximity to some important supply chains, and a government with an increasing reform mindset and a solid stance on being a bolstering technocrat," he said.

"To be successfully competitive, it is about the government making conscious choices. The development of true competitive advantage in Cambodia requires more direction."

The government, he said, should be able to clearly identify which industries to target or which activities to pursue, whether it's export promotion, import substitution, or supply chain integration.

IS CAMBODIA TOO OPEN?

One notable advantage of doing business in Cambodia is that it allows 100% foreign ownership of companies in any sector, but has yet to allow the full ownership of land.

"The competitive advantage is the ease of establishing a business here, and the relatively light-touch regulation that exists. Barriers to entry for any sectors are very low," said Simon Perkins, executive director of Smart Axiata, which runs the Smart mobile service in Cambodia. The unit of Malaysia's Axiata Group Bhd is also active in Vietnam and Laos.

"There are few restrictions in terms of licence commitments and a lot of regulations are still in the formative stage. Anyone can invest, but in the end, it's very much the survival of the fittest."

Mr Perkins contrasts the environment with that of highly regulated and bureaucratic Vietnam, where many businesses end up writing off big losses.

In a very open market, high competition forces businesses to reduce prices. Telecommunication services in Cambodia, for instance, are the cheapest in the region. As many as nine mobile operators were chasing business in 2010 but now there are five. The price for domestic calls on mobile ranges from 5 to 8 US cents or about 1.50 to 2.50 baht per minute, and can be up to 12 cents per minute for international calls.

"I would say arguably [that the cheap price] is a result of the policy of the unfettered competition that the government has allowed," Mr Perkins said.

Banking is another sector that is relatively unfettered, but there is a concern that too much liberalisation of foreign investment laws could pose some risks to the development of local businesses.

"It could be a waste of investment ... because you will get an industry that arrives in a state that has created itself and not necessarily the achievement that the government wanted it to be," said Mr Knuckey, CEO of ANZ Royal Bank.

Though full foreign ownership is a great competitive advantage, Cambodia needs a system that benefits not just foreigners but also brings concrete economic development and opportunity to local people, said the banker.

Lifting the living conditions of local people has been an underlying goal of the government's reform agenda and its campaign to reach middle-income status, but exceptionally low wages of less than $100 a month in most sectors make it hard for unskilled workers to earn a living.

The setting of a minimum wage has been the subject of prolonged debate because high wages could deter foreign investment. In a few sectors, notably garments and footwear, wages have improved as a result of collective bargaining. Workers in other sectors are yet to be covered by regulations and have little bargaining power.

"We should leave it to [negotiating wage] demands and offers rather than government intervention because a minimum wage increase is just a natural course of business," said Van Sou Ieng of the GMAC.

"Productivity and skills are much more important. Provision of vocation training and knowledge to the workers will increase productivity, for which wages will then be increased accordingly," he said.

"We should pay more attention to producing more value-added products. Value-added industries will push the wages up and it will come naturally."

Rising demand for skilled labour and inadequate investment in vocational training have created a shortage of skilled workers in Cambodia, affecting productivity and holding the country back from moving beyond basic manufacturing jobs.

"The solution lies in the hands of the private sector and more coordination within the government itself. I would like to see more collaboration in all sectors to strengthen human resource development and vocational training," said Sok Chenda Sophea, the minister attached to the Prime Minister's Secretary-general Council for the Development of Cambodia.

"In five years' time, the production cost of Cambodia will still be cheaper than countries like Thailand and Vietnam with huge productivity. Logistics will be improved and we will become much more competitive than other Asean countries."

 

"To be successfully competitive, it is about the government making conscious choices. The development of true competitive advantage in Cambodia requires more direction"

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