Working Paper   80

Binding Constraints on Economic Growth in Cambodia: A Growth Diagnostic Approach

Author(s): SAING Chanhang

Published: 01-Mar-2013
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Abstract/Summary

This study applies the growth diagnostic approach, developed by Hausmann, Rodrik and Velasco in 2005, to identify binding constraints on Cambodia’s growth after the crises in 2008 and 2009. Growth was strong during 1999-2009 at an average annual rate of 9.0 percent, but then slowed to 6.7 percent in 2008 and dropped to 0.1 percent in 2009, before rebounding in 2010 posting 5 percent. Average annual inflation rate was between 1 and 7 percent during 2002-2007, but jumped to 25 percent in 2008. Overall consumer prices then declined bringing inflation down to 4.0 percent in 2010. Rebound in export has also been evident after the crisis, but trade deficit persists. Budget deficit remains, but is under control.

Garments, tourism, construction and agriculture, particularly paddy rice, have retained their status as key drivers of growth, though a slower pace of expansion was evident in the construction sector and renewed efforts to promote paddy rice production and milled rice export emerged in mid 2010. On the binding constraints to growth, the study finds that cost of finance has not seemed to be constraint as of 2009. Even though real lending rate rose from -9.0 percent in 2008 to 19.5 percent in 2009, the highest among ASEAN members, the increase resulted primarily from the surge in consumer prices. Credit to the private sector continued to grow by 5 percent in 2009 despite sluggish economic activities during the year, but lower than the 77 percent in 2007 and 50 percent in 2008.

 In addition, there is no sign that access to international finance has been a constraint as executives surveyed in the World Economic Forum Report ranked “foreign currency regulations” 14th in 2009 and 13th in 2010 out of 15 factors worrying investors in doing business in Cambodia. Macroeconomic risk was no longer a concern of firms’ appropriability of return in 2010 with inflation back to the pre-crisis inflation rate and the exchange rate fluctuation under control. Corporate tax rate and land rights do not appear to be constraints, but corruption, lack of dispute settlement mechanisms, limited law enforcement and tax administration are likely to be constraints on growth. The problem of limited self-discovery is also evident, but it does not appear to act as constraint on growth as the survival rate of new exported products stood at around 39.9 percent during 2000-2009.

The issue of poor coordination could be a constraint as confirmed by substantial evidence observed across sub-sectors of the economy. Despite skill mismatch in the labour market and low level of education of the workforce resulting in low returns to education, low human capital does not act as constraint on growth at aggregate level because labour is abundant. On the infrastructure side, there is evidence that inadequate road transport, poor logistic performance and high cost of electricity, are likely to be constraints on growth.   




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