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Series: The Mekong Region and Japan Part 7: Cambodia (1) Current State of the Cambodian Economy and Japan’s Economic Cooperation | Hitoshi Hirata, Senior Representative Cambodia Office Japan International Cooperation Agency (JICA) [Date of Issue: 31/October/2012 No.0212-0864]

Date of Issue: 31/October/2012

Series: The Mekong Region and Japan Part 7: Cambodia (1)
Current State of the Cambodian Economy and Japan’s Economic Cooperation

Hitoshi Hirata
Senior Representative
Cambodia Office
Japan International Cooperation Agency (JICA)

Rapidly growing ASEAN member Cambodia is attracting increasing attention as an operations base for Japanese companies adopting a China+1 strategy. Here we look at current conditions in Cambodia and Japan’s involvement with the country.

1. China+1
Following the 2010 Chinese New Year and the Vietnamese New Year, when workers failed to return to factories and wages continued to rise, leading Japanese manufacturers started looking seriously at Cambodia as their next operational base. Minebea was one of the companies making the decision to manufacture in Cambodia that year, in which US$35 million in investment by Japanese companies was recorded, leading 2010 to become known as the ‘start year’ for investment in Cambodia by Japanese companies. The pace of that investment has since continued to increase, hitting US$75 million in 2011 and US$400 million as at August 2012 (see figure). Areas of investment have also continued to diversify to include garment, miniature motors, automobile wire harnesses, wire harnesses for household appliances, plastic parts and wood chip forestry.

Approved investment in Cambodia by Japanese companies 2. Characteristics of Cambodia
Cambodia has a population of 14 million. Its land area is approximately half that of Japan, but most of that is flat land formed by the Mekong and Tonle Sap Rivers that makes it well-suited for rice and other agricultural production. The agricultural sector accounts for around 30 percent of Cambodia’s GDP, and 70 percent of the country’s labor force is engaged in agriculture, primarily producing rice. Since around 70 percent of the population is less than 30 years old and approximately 300,000 people join the labor market every year, an increase in employment in the fields of manufacturing and service in addition to agriculture is expected.

Ratio of workers above the age of five by sector Cambodia was plagued by a long period of civil war from the 1970s onward. However, since 1998, the Cambodian People's Party led by Prime Minister Hun Sen has increased its seats, stabilizing politics and civil order. Moreover, Cambodia recorded an average economic growth rate of 7.7 percent for the 10 years up to 2011 (IMF figure). Because most exports have been textile commodities for US and European markets, the recession hitting the West due to the Lehman shock caused economic growth to decelerate to 0.1 percent in 2009, but it recovered to six percent in 2010 and then 6.5 percent in 2011, and growth of close to seven percent is forecast this year. In addition to agriculture and apparel exports, tourism is also one of the main engines of economic growth. Siem Reap, home to the remains of the Angkor culture which flourished from the 12th through to the 14th century, attracts more than two million tourists every year, and according to the Cambodian government, the country had already welcomed 990,000 tourists in the first quarter (January-March) of 2012, representing a substantial year-on-year increase of 27.8 percent.

The government has set the goal of doubling Cambodia’s GDP by 2020, and it is hoped that manufacturing sector growth fuelled by foreign direct investment (FDI) will help to achieve this aim. The government of Cambodia has established special economic zones (SEZs) where manufacturers can enjoy tax breaks and other incentives as measures to facilitate FDI. There are currently 23 authorized SEZs, eight of which are already in operation. Many Japanese companies are manufacturing in factories built within these special economic zones.

(The main SEZs and the companies established there are as follows:
Phnom Penh: Yamaha Motors, Ajinomoto, Minebea, Sumitomo Wiring Systems
Tai Seng Bavet: Swany Corporation, Yorks
Sihanoukville: Izumi Electric, Asle Electronic
Sihanoukville Port: Oji Paper
Koh Kong: Yazaki Corporation)

3. Cambodia’s development challenges
While Cambodia is growing swiftly, there remain many other challenges in terms of the development of infrastructure, health care and education, etc., in comparison with neighboring countries. While 99.1 percent of single-digit national roads are paved, the figure drops steeply to 30.2 percent when it comes to double-digit roads and less than 1.7 percent in the case of provincial and local roads. Power supply extends to only around 20 percent of homes, and around 84 percent of the population live in villages without electricity, using batteries, firewood and charcoal. In terms of education, in recent years the elementary education attendance rate has risen to more than 90 percent across the country, but the secondary school attendance rate is still less than 40 percent. Where average life expectancy (as of 2009) in Japan is 83 years, 76 in the Philippines, 72 in Vietnam and 70 in Thailand, it is only 61 in Cambodia.

In the Country Assistance Strategy for Cambodia adopted by the Government of Japan in April 2012 three sectors—economic infrastructure development, strengthening the private sector and developing the agricultural sector—are emphasized as key issues in terms of achieving poverty reduction through economic growth.

Looking first at economic infrastructure development, JICA is focusing its resources on supporting the Southern Economic Corridor which links Ho Chi Minh, Phnom Penh and Bangkok. The Neak Loeung Bridge over the Mekong is currently being constructed using grant aid, with completion scheduled for March 2015. National Road No.1, which runs from the border with Vietnam through to Phnom Penh, is being upgraded east of the Mekong River with the Asian Development Bank financing and west through Japanese grant aid, and completion of the Neak Loeung Bridge is expected to transform the logistics aspect. Expansion of National Road No. 5, which runs between Phnom Penh and the Thai border (Poipet), is also currently being planned. National Road No. 5 not only serves as the key distribution network for trade between Thailand and Cambodia, but is also the main route linking Battambang Province, a major rice-producing region located in the northwest of Cambodia, with Phnom Penh where most of that rice is consumed. Since the capacity of the existing two-lane roads will present problems due to revitalization of distribution in the near future, JICA is conducting a systematic feasibility study toward using yen loans to expand and upgrade National Road No. 5. In relation to power, JICA is providing financial support for the development of the necessary transmission lines and substations for a stable power supply, as well as in small-scale hydropower generation to bring power to rural areas. Moreover, a technical cooperation project will also be undertaken to improve the skills of the Electricite du Cambodge’s electricians.

In terms of strengthening the private sector, to improve the investment environment, a ‘Japan Desk’ has been set up within the Council of the Development of Cambodia (CDC), which handles investment into Cambodia, to answer the questions of Japanese firms looking at investing in the country and provide investment-related information. The number of Japanese companies visited the Japan Desk increased to 59 in September two years ago, to 90 in the same month last year, and then to 109 this year. (There is no data specifically for small and medium enterprises.) Creating an investment guidebook in Japanese is also part of getting out information on the investment environment, and information on investment procedures, tax break schemes, infrastructure conditions and the living environment, etc., is updated and distributed every year. For the past three years, Cambodian investment seminars have been held once a year, comprising presentations on the investment environment by CDC Minister Sok Chenda and from Japanese enterprises in Cambodia on their experiences there. The July 2012 seminars in Osaka and Tokyo were attended by a total of 442 people.

Since 1999, JICA has been providing assistance for the development of a container terminal in Sihanoukville Port, Cambodia’s only deep-sea port, aiming for nine-percent growth in container freight. Yen loans were also used in the construction of a special economic zone in the area behind the port, with the SEZ formally handed over in May 2012 and efforts now underway to attract export industries. Harta, a subsidiary of Oji Paper, has already become the first company to sign up, and factory construction is underway.

In the agricultural sector, while productivity might have risen, Cambodia’s rice producing capacity is still low compared to its neighbors. To boost that capacity, JICA will continue to invest in irrigation facilities and provide the necessary technical cooperation for maintaining and managing these, as well as for farm management.

4. Conclusion
While Cambodia is a small country hemmed in by Thailand and Vietnam, it is moving forward swiftly with infrastructure development and human resource development, and is expected to advance over the coming years as an increasingly promising destination for investment transferred from China. With its recovery from a protracted civil war now complete, the relationship between Japan and Cambodia as an emerging country sustaining strong economic growth should continue to strengthen in order to promote the balanced development of the Mekong region.

(original article : Japanese)

(For the Japanese version of this article)

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