Study: FDI, Political Stability Crucial To Cambodia's Economic Development

While Cambodia’s move from a centrally planned economy in the 80s to a market-oriented economic system saw increased levels of inward foreign direct investment (FDI), it wasn’t until the UN-supervised election in 1993 and the enactment of the Investment Law in 1994 that Cambodia’s economic development began to benefit from foreign interest in the Kingdom.

This is one of the findings in a self-funded empirical study conducted by Seng Sothan, an academic staff member at the College of Business Management, Life University, Sihanoukville, Cambodia. Reviewed by Xibin Zhang, associate professor at Australia’s Monash University, and published on the open access academic manuscript publisher Cogent OA’s website, Causality between foreign direct investment and economic growth for Cambodia reviews the impact of FDI on Cambodia’s economic development.

The study also supports a statement late last year by Cambodia Minister of Mines and Energy, Suy Em, that it was not until 1999 that real progress came to Cambodia (See: Government Happy For Chinese Dominance of Cambodia Energy Sector to Continue)

After ousting the Khmer Rouge in 1979, Cambodia was ruled by the Vietnamese-backed People’s Republic of Kampuchea (PRK) until the Vietnamese withdrawal in 1989 and the signing of the Paris Peace Agreement in 1993 which ended the conflict.

Cambodia’s Economic Development Accelerated After Khmer Rouge

There is no doubt that FDI has played a very important role in driving Cambodia's economic development — There is no doubt that FDI has played a very important role in driving Cambodia’s economic development John Le Fevre

While still a centrally-planned economy with the government making almost all of the economic decisions, Cambodia did not attract much investment from the outside. And the effect, according to the study, was reflected in the pace of Cambodia’s economic development.

Between 1980 and 1989, the years the PRK and their Vietnamese overlords were in control of Cambodia, the real Cambodia gross domestic product (GDP) was only 4.69 per cent. Between 1990 and 1993 as the different warring factions were working out a peace deal, Cambodia’s GDP was not much better, growing at just 4.94 per cent.

From almost zero in the 1980s Cambodia FDI to Cambodia gradually increased to an annual average of roughly US$1 billion in the second half of the 1990s.

Despite the peace agreement full political stability was not yet achieved, with an insurgency still raging in some provinces. This resulted in only 5.76 per cent economic growth between 1994 and 1998 and it wasn’t until the Investment Law was enacted that Cambodia’s economic development began to benefit from its transition from a centrally-planned economy to a market-oriented one.

With the Khmer Rouge gone from the scene after 1996 and the Cambodia Investment Law in place, bringing with it increased stability, more business-friendly investment descended on Cambodia, leading to more investments and much higher economic growth. Between 1999 and 2014 Cambodia experienced 8.1 per cent GDP growth.

Aside from political stability, which can be credited to the leadership of the Cambodian People’s Party (CPP) headed by long-time Prime Minister Hun Sen, the study also notes that expansion of the four pillars of growth driving Cambodia’s economic development – construction, textile and garment, tourism, and agriculture – contributed significantly to Cambodia’s stronger economic growth.

However, the study notes that external shocks, such as the financial crisis that hit the United States and other countries in 2008, can greatly influence economic growth. This was reflected in 2009 Cambodia GDP growing just 0.1 per cent.

The study also found that FDI has helped boost Cambodia’s economic development by augmenting physical capital at the same time, confirming the important role that manufacturing and investment have played in Cambodia’s economic development to date.

Implications For Policymakers

In an email Mr Sothan to AEC News Today that the purpose of his study was to provide Cambodia law makers with irrefutable data on which to base policy decisions with which to continue attracting the levels of FDI it has over the past recent years.

“There is much debate on the relationship between foreign direct investment (FDI) and economic growth in recipient economies. While many studies support the growth impact of FDI, some others do not, or only in host economies with a strong financial system, or with a high level of human capital. There is no doubt that FDI has played a very important role in driving Cambodia’s economic development”, he said.

The findings have some crucial policy implications. According to the study Cambodia’s lawmakers should focus on policies that are business, investment, and investor-friendly, while at the same time ensuring the continuation of political stability if Cambodia’s economic development is to continue into the future. The study also points to the importance of developing human capital to take full advantage of inbound FDI.

Specifically, the study suggests that the government needs to produce sound macroeconomic policies, develop physical infrastructure, remove restrictions against inbound FDI, enhance financial sector development, and promote encouraging environments for trade and investment if Cambodia’s economic development is to continue at the pace it has in recent years.

Related:

Political violence threatens economic stability in Cambodia (Global Risk Insights)
Economy resilient to global headwinds: World Bank (Phnom Penh Post)
FDI up 25% (Khmer Times)

Study: FDI, Political Stability Crucial to Cambodia’s Economic Development added by Jose Rodriguez T. Señase on February 3, 2017
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