Spotlight - Cambodia: June 5, 2023

Cambodia is something of an economic paradox.

The country is one of the poorest members of the Association of Southeast Asian Nations (ASEAN)—besting only Laos and Myanmar with a GDP per capita of $1,896—but has for about 20 years been one of ASEAN’s fastest-growing economies. Cambodia is projected to post 5.8 percent growth in 2023, better than all ASEAN countries except the Philippines (at 6) and Vietnam (also at 5.8), which is now facing economic headwinds. The International Monetary Fund expects Cambodia to become Southeast Asia’s fastest-growing economy by 2025.

Cambodia benefits from being underdeveloped. Like in China before Deng Xiaoping or Vietnam before normalization with the United States, there are heaps of roads to be built, internet cables to be laid, and a potential middle class to buy phones and cars—all of which boosts growth. Cambodia’s low labor costs continue to attract foreign direct investment as well, with Cambodians producing goods like garments and sneakers for consumption all around the world.

The Cambodian government has long welcomed such investment with open arms, seeing international finance as a means to develop the country and win public legitimacy. The government has also looked to diversify its export markets beyond the West by pursuing a number of free trade agreements (FTAs), not only with close political partner China but also with Bangladesh, Japan, South Korea, and the United Arab Emirates.

These agreements may not be of the quality of agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP). But they could, taken together, help Cambodia fill the gap left by the European Union’s 2020 partial withdrawal of its “Everything But Arms” (EBA) trade privileges.

They will likely not, however, replace the benefits Cambodia derives from accessing the U.S. Generalized System of Preferences, should Washington refuse to renew Cambodia’s now-expired membership. The State Department’s November 2021 business advisory on Cambodia—which rightly warned of “systemic corruption, transnational organized crime, and human rights abuses”—surely scared off U.S. investors as well.

Yet while some U.S. and European investors tend to remain wary of Cambodia, investors elsewhere, including in U.S.-allied Japan and South Korea, see Cambodia as a market with substantial upside. It has a young population; a pro-business and reasonably stable government (particularly compared to coup-prone Thailand); low labor costs; a growing consumer class; and improving infrastructure.

For those less concerned about Phnom Penh’s poor human rights record and deteriorating relationship with the West, Cambodia is an attractive market. But only to a point.

Indeed, the country’s geopolitical alignment and domestic struggles (on issues like corruption, in particular) risk undermining its potential move up the value chain, vis-à-vis Malaysia and Vietnam.

Washington, Brussels, Tokyo, and others seeking to reduce reliance on China for the production of critical goods like semiconductors are looking to perceived “friendly” countries like India and Vietnam instead. Leaders in Washington and allied capitals correctly do not put Cambodia—perhaps China’s closest partner in Southeast Asia—in that “friendly” category. Firms based in those countries will thus almost surely not consider Cambodia as a potential non-China manufacturing hub for must-have items. Phnom Penh simply has not won that trust. The country’s limited human capital doesn’t help either.

So, while Cambodia’s economy is set to prosper in the short-term, a geopolitical rethink and structural reforms will be critical to sustaining medium- and long-growth. Without them, Cambodia risks missing the boat on “friend-shoring” and, ultimately, stagnating.

Charles Dunst is an adjunct fellow (non-resident) with the Southeast Asia Program at the Center for Strategic and International Studies in Washington, D.C.

Charles Dunst

Charles Dunst

Former Adjunct Fellow (Non-resident), Southeast Asia Program