Role of Industrialization in Cambodia
Case Study on: Garment Industry
by Pisidh VOE, May, 2010
The Cambodia economy grew about 10 percent per year from 2004 to 2007, driven largely by an expansion in the garment sector, construction, agriculture, and tourism. GDP dropped to below 7 percent growth in 2008 and probably contracted in 2009 as a result of the global economic collapse. TWO agreements on Textiles and Clothing were finished in 2005. The garment industry currently employs more than 280,000 people -about one third of the work force and it contributes more than 70% of Cambodia’s exports. The tourism industry has continued to grow rapidly, with foreign arrivals more than 2 million per year in 2007-08, however, economic troubles abroad dampened growth in 2009. The global financial crisis is weakening demand for Cambodian exports, and construction is declining due to a shortage of credit (CIAWF, 2008).
The continued increasing of the Cambodian garment industry, the number of factories indicated there are 129 factories accrued in 1998 and increased until 258 of factories in 2005, this increasing it is the result of industry that benefited from safeguard measures imposed by the US and the EU to restrain Chinese’s exports. Moreover, garment factories maintained its good labor compliance, otherwise the industry benefited from the recent improvement in trade facilitation reforms, which reduced time and cost related to shipments of imports and exports (NEAK. S, YEM. S, 2007).The garment industry contributed to the economy by providing more than 280,000 jobs as of December 2005. In absolute value, this industry’s local value added was estimated at US$113 million in 1998 if 30 percent applied contribution rose dramatically to US$591 million in 2004, more than five times an increase in six years. Hence in terms of an absolute value, this local industry also made some significant impact on poverty in terms of income, empowerment (transformation of economic and social status) and rural livelihoods. In addition, the garment industry has reduced the increasing number of young low skilled labor force. It has also decreased the pressure of extreme poverty in rural areas, which have been plagued by insufficient food, shelter and clothing and by illness and illiteracy (NEAK. S, YEM. S, 2007).
According to the World Bank’s Cambodia Poverty Assessment t Subject in 2006, remittance has been used in productive investment such as buying fertilizer or buying pigs to rise, renovating their homes, digging wells, investing in farm inputs or livestock, purchasing motorbikes and TVs, and sending their younger children to school. The money was also used to sustain low levels of immediate consumption, allowing the flood and drought-affected households to purchase rice and other food, settle health expenditures, invest in re-beginning rice production, and pay off debts Hence, the impact of income from this sector goes far beyond the workers employed in this sector. At least one million people in the country benefited from garment exports through direct and indirect employment and income, and remittance (World Bank, 2006). In December 2004, Multi-Fiber Agreement was expired, but Cambodia still benefits somewhat from the US government’s bilateral quota allocations. However, with the expiry of trade restrictions, all countries face global competition. In the long run, smaller producers like Cambodia will find it difficult to compete with the integrated supply chain, service standards and savings on volume that the large producers can offer, unless they can somehow distinguish themselves in the market (ILO, 2004).
On the other hand, some factories have actually been expanding because of increased orders. Cambodia depended on so much on garment industry if compare with other countries around the world, so there are pressing reason to reform. The labor productivity and would have included with developing skill of workers (ILO, 2004). Moreover, the comparative advantages of Cambodia are lowest labor cost in the world, at 23 US cents per hour. However, costs are driven up by informal and unpredictable payments within the government bureaucracy and the high costs of transport, electricity and other inputs and electricity costs US 15 cents per kilowatt-hour in Cambodia, compared with the international norm of just 6 cents. Amounts paid in unofficial payments added up to 7 per cent to the cost of total sales. For example, the transport of one container from the factory to the customer should cost just under US$4,000, according to the official schedule of charges, including port fees, loading costs and customs charges. However, the real cost is well over US$6,000 – adding more than 37 per cent to the official costs. These are the critical issue that Cambodian government took into account.
In 2005, China signed Memoranda of Understanding with US and EU China on restricting the rapid growth of Chinese textiles and clothing exports to these markets play an important role in textiles and garment industry. China stills the main export of textile and garment in the world. And it extends large scale textiles and clothing to Cambodia by incentive from China Government in political dimension. In other to engage with comprehensive investment, Cambodian government has adopted many favorable policies aimed at attracting overseas FDI. For example, enterprises investing in Cambodia will be exempt from all taxes for nine years and imports of raw materials are free of import tariffs (Jinmin. W et al, 2006). Mover, exporting from Cambodia still has duty-free and quota-free market access to Australia, Canada, the European Union and Japan. In addition, the United States has granted loose quotas and favorable import tariffs for Cambodian textiles and garments. The United States imposed an average 17 percent tariff on Cambodian garment exports in 2007(Martin, M. 2007).
China and Southeast Asian nations will usher in the world’s third-largest free trade area and some manufacturers in Southeast Asia are concerned that cheap Chinese goods may flood their markets, once import taxes are removed, making it more difficult for them to retain or increase their local market shares ( Jinmin. W et al, 2006). It is the big challenges for Cambodia also, and it is the turn for Cambodian government to enhance an environment of investment and build own capacity to competition with China-ASEAN’s free trade zone. Currently, Cambodian government has been constructed and going on to build many infrastructures such as road construction, bridge, railway in the picture of loan and grant from Thailand, China, Vietnam, Japan and ADB to facilitate for transportation (UNESCAP, 2009).Electricity still high price if we compared with the neighbor country, and it is the consequence of added production cost. In other to deal with it government invested in electricity. Hydropower project 29 planned to finish construction in 2020 (T. Sereyvuth, 2008). Evident of unofficial payment in garment industry, it is the result of invasion corruption. To reach with this, Prime Minister of Cambodia announced several concrete measures to streamline the import-export documentation process in an effort to reduce corruption and make the garment industry more competitive. Moreover, government agreed that it must do more to improve the investment climate by tackling the high cost of business, bureaucratic red tape and corruption (Cambodia Daily, 2004).
Drawing conclusion, garment sector play importance role and contributed to Cambodia’s economy. The sector employs to contribute a lot to poverty reduction. IMF (2006) reported Cambodia received dept relief from the IMF equal to about US$82 million in January 2006 under the Multilateral Debt Relief Initiative (MDRI). Moreover, Cambodia can use saving arising from MDRI to implement a new rural irrigation project (IMF, 2006). At least one million people got the benefit from garment industry in a picture of direct and indirect. Removal quota in garment and opening free market of China-Asian, it is the main barrier of Cambodia’s economy and in other to deal with Cambodian government reformed policy and constructed infrastructure such as road, bridge, railway and electricity to enhance an investment climate and reach to compete with global market.
Reference
1. Cambodia Daily, 2004
2. CIAWF, 2008, Cambodia Economy Profile
3. ILO, 2004: International trade agreements and the Cambodian garment industry
4. IMF, 2006: Statement by IMF Staff Mission to Cambodia
5. Jinmin. W et al: The Expansion and Textiles and Clothing Firm of China to Asian least Development Country: Case Study in Cambodia
6. Martin, M. 2007. “U.S. textile and clothing trade with China and the world: trends since the end of quotas”, Congressional Research Service report RL34106, Washington D.C.
7. MoC, 2006, Cambodia’s WTO Accession: Risks and Benefits
8. NEAK. S, and YEM. S, 2007: Trade and Poverty Link: The Case of the Cambodian Garment Industry
9. T. Sereyvuth, 2008: Hydropower Development in Cambodia
10. UNESCAP, 2009: Public Partnership Infrastructure Development
11. World Bank. Cambodia Poverty Assessment 2006. Prepared by the World Bank for the Consultative Group Meeting. February
