Leveraging Trade for Economic Growth in Cambodia

This paper attempts to answer three important questions: (1) Why does trade matter? (2) Whyis trade vital for Cambodia’s growth? (3) What policy priorities for Cambodia will make tradework for economic growth? First, trade matters because it increases growth. Openness to trade affects growth by: allowing a country to exploit its comparative advantages and thereby enhance the efficiency of resource allocation; facilitating acquisition of foreign technology and knowledge and thus raising productivity; and attracting more investment, stimulating competition and improving efficiency and competitiveness. Although academic debate has failed to reach a consensus due to problems such as weak theoretical foundations, measurement of openness, reverse causation and diverse methodologies, most economists now agree that an outward-oriented trade policy promises economic benefits. This is why almost all governments in both developed and developing countries have designed trade policy as a key element of their growth and development strategies. Second, trade is important for Cambodia’s growth strategy for at least three reasons. One, Cambodia has transformed its trade sector into an engine of economic growth over the last two decades, and that provides the momentum for further liberalisation and development of trade for future growth. Two, regional economic integration has moved toward regional free trade zones as the way to boost trade and promote prosperity. Given the country’s strategic location in the fast growing East Asian region, these dynamic regional cooperation and integration processes represent huge opportunities for export growth, diversification, competitiveness and growth. Three, most analysts agree that much remains to be done in Cambodia’s trade sector development. Despite significant progress, the trade sector remains weak and vulnerable. In addition to being at the low end of the value chain and lacking diversification, Cambodian exports are constrained by cumbersome customs procedures, infrastructure bottlenecks, poor logistics and trade facilitation and lack of capacity to meet technical standards. Third, the key to enhancing the role of trade in Cambodia’s growth is to remove obstacles. Policy priorities include, among others, investing in trade-related infrastructure; improving logistics; upgrading customs procedures; strengthening regional cooperation and connectivity; stepping up export market information services; and improving standard management systems. These measures should come together with complementary policies including macroeconomic stability and financial sector development; improvement in the investment and business climate; investment in general infrastructure, education and health; technology and knowledge transfer. It is also recommended that further trade policy liberalisation and reforms gain political support from the leadership, receive momentum and impetus from key stakeholders and be supported by effective and responsive institutions.