Report on the Cambodia Mission
June 12, 2015
GRIPS Development ForumA GRIPS Development Forum (GDF) team consisting of Kenichi Ohno, Izumi Ohno, andAkemi Nagashima visited Phnom Penh during May 27-29, 2015 to study the features andissues of Cambodia’s industrial policy. This was one of the regular research missions
conducted by GDF to compare industrial policies across countries and draw lessons fordeveloping or emerging economies including Ethiopia1. Before and during the mission wewere supported by Mr. Hiroshi Suzuki (CEO & Chief Economist) and Ms. Chea Dalin(secretary) of the Business Research Institute of Cambodia (BRIC) as well as Mr. Masayuki
Ishida, Chief Advisor of the JICA SME Promotion Policy Formulation Project, to which weare very grateful. We would also like to express our appreciation to all people who kindly
received us and shared valuable information with us. The mission schedule and collected
documents are given in the appendix section.
1. Overview
Cambodia began economic development from the status of a post-conflict fragile state. Afterthe mass killing by Khmer Rouge and subsequent intervention by Vietnam, peace was
finally restored under UN supervision, and King Sihanouk returned to Cambodia in 1993.
Initially, sheer survival was the name of the game for the new government. At that time, “wewere trying to swim, keep our heads above water, and got whatever we could get” in thewords of a Cambodian high official. Policy capability and organization were weak, the goal ofpoverty reduction was imposed from outside, and two international organizations sided withdifferent ministries to create inconsistent policies.
From a little over ten years ago, however, the Cambodian government began to graduallyregain policy initiative and ownership. The Supreme National Economic Council (SNEC), a
forum consisting of top policy makers, started to concretize Prime Minister Hun Sen’s visionin the Rectangular Strategy of 2004, which laid out broad directions for the nation and wasrevised twice subsequently. The Rice Policy of 2010 was the first sectoral master plancalling for concrete policy action to export surplus rice by processing and adding value. FDI
policy (the 1994 FDI law was revised in 2003 and 2005) and SEZ law (2005), as well as thedevelopment plan of Sihanoukville, were drafted. The latest addition is the Industrial
1

The purpose of our JICA-commissioned missions, including this one, is to collect information on industrial
policy formulation in selected countries for the policy learning of other developing countries. During Phase I
of Japan-Ethiopia industrial policy dialogue 2009-2011, GDF visited Singapore (August-September 2010),
Korea (November 2010), and Taiwan (February 2011). During Phase II, India (September 2012), Mauritius(October 2012), Malaysia (June 2013), Indonesia (June 2014), Rwanda (August 2014), and Thailand (May2015) were visited in addition to Cambodia. Views expressed in this report belong to the GDF team and are
not necessarily the views of JICA.

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Development Policy (IDP) 2015-2025, approved in March 2015, which is a key document
guiding Cambodia’s future industrialization (we will discuss it in detail below). To implement
IDP, the Productivity Committee and the Labor Advisory Board have also been created, andmore mechanisms may follow.
When GDF visited Phnom Penh previously, in 2004, the government was weak and passive,with development policies dominated by the agenda of powerful donors. Today, we canclearly see the emergence and dynamism of policy ownership and national pride, withrelatively young leaders and officials taking charge. Policy evolution is in progress, andCambodia today is a very different nation from Cambodia in the past.
Cambodia has just attained or is about to attain the lower middle income status with per
capita income of $950 in 2013 (World Bank data)2. The population is about 15 million, withmore than half under the age of 24. The poverty ratio declined rapidly from 50% in 2004 to
16% in 2013. The Gini coefficient also fell to a mere 0.26 suggesting that, if true, Cambodia
is one of the most equitable countries in the world (this data probably needs checking).
Financial deepening is also underway with bank deposits and lending reaching to 80% and
65% of GDP, respectively. International reserves are at a reasonably comfortable level of 4.5
months of import. According to the assessment of the World Bank and IMF, Cambodia’s
foreign debt service burden is low.
Progress is visible and expectation is rising. However, like many other latecomer countries
that show high growth at first, Cambodia is still in the recovery phase from the suppressed
past in which economic opening and liberalization alone can attain high growth. Up to now,
the quality of industrial policy did not matter very much because ODA, FDI, and autonomous
private-sector resurgence were sufficient to push the country forward. However, realachievements in productivity and competitiveness are still limited. From now on, the qualityof industrial policy, and private sector response to such policy, will matter greatly if
Cambodia wants to avoid a future middle income trap and climb further to upper middle
income and above. In IDP mentioned above, broad directions are set more or less correctly,
but concrete details must be properly installed and executed.
We are surprised and happy to see many changes in Cambodia during the last decade.
Some governments are static and their policies hardly improve. But in Cambodia, rapidlychanging landscape, not only in physical infrastructure but also in policy mindset andaspiration, gives us hope. However, Cambodia’s starting point was low. The country has
made visible progress but still has a long way to go before it is fully industrialized. Much
work is required for both government and the private sector.

2

According to the World Bank’s latest income classification based on GNI per capita as of July 2013,
Cambodia’s income was $950 per head, slightly below the threshold of $1,045 for lower middle income
countries. Other sources report somewhat higher income for Cambodia. It is highly likely that Cambodia has
already joined the group of lower middle income countries by 2015.

2

2. Leading policy organizations
The impact of Khmer Rouge massacre is still felt in Cambodia. Experienced leaders andexperts in their 50s and 60s are in serious shortage. Young dynamic leaders are emerging,but they lack practical knowledge for executing policies effectively or competing in the global
market.
Presently, Cambodian policy formulation is characterized by (i) a developmental leadershipof Prime Minister Hun Sen; (ii) a relatively small number of high-ranking technocrats
supporting the Prime Minister; and (iii) policy competition and collaboration among suchtechnocrat groups as well as economic ministries. Personal rapport and cooperation amongsuch technocrats seem to be ensuring policy coherence more effectively than formalinter-ministerial coordination mechanisms. Cambodia does not have a super planning
agency that stands above all ministries such as the Economic Planning Unit (EPU) of
Malaysia, BAPPENAS of Indonesia, or the Economic Planning Board of Korea in the
1960s-70s. Cambodian policy making is an interactive and relatively flexible process among
multiple leaders and ministries. Such policy making is perhaps suited to Cambodia at thisparticular development stage.
More specifically, the Supreme National Economic Council (SNEC), the Ministry of Economy
and Finance (MEF), and the Council for the Development of Cambodia (CDC) are the threelead organizations at different levels that cooperate to produce and execute development
policies. According to a number of officials we interviewed, this centralized mechanism isnecessary for speed and coherence in key policy formulation because line ministries are too
weak to draft and implement policies. Some noted the lack of policy capacity at the Ministryof Industry and Handicraft (MIH) or the Ministry of Agriculture, Forestry and Fisheries(MAFF), and at present the Ministry of Planning (MOP) is mainly responsible for statistics.
This raises an interesting question of balance between central policy management versus
the need for strengthening line ministries3.
SNEC, established in 2000, is the Prime Minister’s think tank (or the “Brain Bank” as someofficial calls it) which functions as an action-oriented inter-ministerial discussion andcoordination forum attended by high officials, with particularly strong representations by
MEF and CDC. Its task is to produce real policies rather than just talk or formally approve.
SNEC-drafted policies go to the Council of Ministers and relevant ministries. SNEC consistsof about 10 minister-rank members, and is supported by a secretariat staffed with about 30
current (non-seconded) officials of various ministries and agencies including MEF, MOP,
3

Ethiopia is moving toward central management of such key policies as FDI and industrial parks. The
Rwanda Development Board is similar to Cambodia’s CDC as it covers wide policy issues including FDI,
industrial parks, SMEs, IT industry, etc. overwhelming line ministries. In our opinion, policy centralization is
acceptable and even inevitable in a latecomer country in the short run, but we also advise strengthening
productive-sector line ministries so they can take over key economic functions in the future.

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MOC, CDC, and NBC (central bank). SNEC, which was previously chaired by a MEF Vice
Minister, is now chaired by the MEF Minister. This may be good for elevating the authority of
SNEC, but there is a risk that SNEC meetings may become less frequent because the MEF
Minister is usually too busy.
MEF is the key ministry for economic policy formulation in Cambodia. It oversees fiscal
revenue and expenditure as well as macroeconomic balance and viability, but it also has aleading role in development and industrialization. In most countries, macro balance andindustrialization are usually handled by separate ministries or mechanisms because they
are not only very broad but also often in conflict over a budget constraint. It is possible toembody both functions in one ministry, such as MEF, but this will tend to create a very
powerful ministry that requires high policy competency in its officials. To fulfill its role, during
the last few years, MEF has been training young economists in their 20s and 30s by sending
them abroad for study and hiring them for hands-on policy training at the Ministry. In our
meeting at MEF, we spotted six young officials sitting beside the Secretary of State, one ofwhom explained to us the main thrusts of IDP.
CDC was established in 1994, initially to manage external resource inflows into Cambodia.
By now, it has become a strong inter-ministerial implementation agency. CDC consists of theCambodia Rehabilitation and Development Board (CRDB, for ODA management), theCambodia Investment Board (CIB, for FDI administration), and the more recently (in 2005)
added Cambodian Special Economic Zone Board (CSEZB, for SEZ management). While itis an implementing agency, CDC is expected to function, and actually partly functions, also
as a policy proposing agency like Malaysia’s MIDA or Rwanda’s RDB4. MIH is a member of
CDC but does not lead its operation. For foreign investors, CDC, which grants licenses andincentives, is the first point of contact as well as the place to raise and solve issues. IDP
proposes to further enhance CDC for industrial development.
In terms of personalities, there are policy leaders in these and other economic mechanisms,
ministries, and agencies who have the trust and support of the Prime Minister5. Theycollectively form the Prime Minister’s advisory group and lead the nation along adevelopment path. Their precise relations and responsibilities, how they actually compete orcollaborate in policy making, and correspondence between these personalities and key
bodies such as SNEC, MEF and CDC, could not be fathomed by our three-day mission.

4Powerful one-window agencies such as these are often modeled after Singapore’s Economic
Development Board (EDB). Apparently the objective is to concentrate limited human capacities in one
agency for speed and efficiency rather than spreading them over many agencies. Before adopting, however,
the applicability of the Singaporean model, that works well in a small city state with very high capability in all
ministries and agencies, to an average latecomer country with limited policy experience should be
examined carefully.
5
They include Hang Chuon Naron (Minister of Education), Aun Porn Moniroth (Minister of Economy and
Finance), Vongsey Vissoth (Secretary of State, MEF), Keat Chhon (Deputy Prime Minister), Sok Chenda
Sphea (Secretary General, CDC), Cham Prasidh (Minister of Industry and Handicraft), Sun Chanthol(Minister of Commerce), and others.

4In addition, Cambodia has a large number of committees and sub-committees at the
government as well as ministerial level. They include the Economic and Financial Policy
Committee, and the Committee for Private Sector Development Affairs (its subcommittees
include SMEs, Investment Climate and Participation of Private Sector in the Infrastructure
Development, and Corporate Governance). New committees are added as necessary, suchas the Advisory Council for Development of Cambodian Industry (related to IDP). There isalso the Government-Private Sector Forum which meets biannually, chaired by the Prime
Minister and attended by all cabinet members, and ten working groups (e.g., agriculture andagro-industry, tourism, manufacturing/SME/services, banking and financial services). Withlimited time, the mission was unable to grasp the overall structure of these sub-committees,task forces, and working groups. Their functions and effectiveness must be studied
separately.
In sum, Cambodia has policy-minded leaders and technocrats working jointly for policy
initiatives and execution. Such a process seems healthy and appropriate as long as policy
competition among different groups remains constructive and non-revengeful, and if it
simultaneously achieves policy continuity and dynamism. How this Cambodian modelcompares with the “Flexible Structure of Politics in Meiji Japan” is another interesting topic
that must be pursued on another occasion6.
Another critical issue is how to institutionalize good practices and mechanisms establishedby the current relational policy formulation, and pass them onto the next generation of policy
makers with modifications and improvements as necessary.
3. Industrial Development Policy 2015-2025
Cambodia’s key policy documents for national development consist of the Rectangular
Strategy (RS) for Growth, Employment, Equity and Efficiency (RS I of 2004, RS II of 2008,
and current RS III of 2013), the National Strategic Development Plan as the RS’s five-year
working plan (since 2006; the current one covering 2014-2018), and annual budgets7. For
effective implementation, these policy documents need to be complemented by concrete
guidelines for selected key sectors, and this need has so far been filled only partially andincompletely. The Rice Policy, FDI and SEZ policies, and the development plan for
Sihanoukville are the ones that already exist, but their concreteness and implementability
6 Junji Banno and Kenichi Ohno, in Meiji Restoration 1858-1881, Kodansha Gendai Shinsho, 2010, argued
that Meiji Japan pursued multiple national goals successfully by allowing a large number of policy leaders toform and re-form coalitions flexibly to both compete and cooperate, rather than by a top-down order of acharismatic leader who stayed in power for long. For English excerpts see:www.dlprog.org/publications/the-flexible-structure-of-politics-in-meiji-japan.php
7 Before the RS, there were two overlapping strategic documents in Cambodia reflecting donor rivalry—the
Socio-Economic Development Plan (SEDP II: 2001-05) formulated by MOP with the support of ADB, andthe National Poverty Reduction Strategy (NPRS: 2003-05) formulated by MEF with the support of the World
Bank. The formulation of RS of 2004 and NSDP of 2006, by merging SEDP and NPRS, should beunderstood as a process in which the Cambodian government regained policy ownership.

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vary. This year the government added Industrial Development Policy (IDP) to the list, whichmeans that Cambodia is now becoming ready to design and execute this very important
policy component.
Completion of IDP also means that Cambodia has shifted from the previous development
regime where poverty reduction was the main objective to a regime where value creationand industrialization take the central stage. Even in that case, there is an ongoing debate as
to whether government should provide only general support and frameworks to all sectors
and firms without sectoral preference or it should work selectively and proactively with theprivate sector to create certain champion products. The answer to this question appears
undecided at this moment in Cambodia. If industrial policy intends to go beyond justliberalization, integration, and provision of good business conditions, the Cambodian
government must engage in serious policy learning—including industrial human resource,
SME promotion, productivity movement, FDI marketing, strategic export promotion, andregional and corridor development—because the current policy capability of Cambodia is
still low. East Asia abounds in good policy practices from which much can be learned.
Moreover, free market orientation of the past may have to be adjusted. Cambodia’s policy
stance has been relatively liberal, featuring open FDI policy which accepts foreign investorseven in commercial, financial, telecom, professional, and other services. Although thisliberalism benefited the nation by providing reasonably good financial, communication, andother services which can support industrialization, we also believe that it is possible to add
selectivity and targeting in industrial policy without abandoning the liberal businessenvironment which Cambodia has created.
SNEC began to prepare IDP in 2012 with JICA support. The final document was approvedby the Council of Ministers on March 6, 2015. CDC will be responsible for managing andcoordinating IDP implementation. The content of IDP, as explained to our mission by MEF
officials, can be summarized as follows.
IDP’s overall objectives include diversification of the industrial base, value addition,competitiveness, and meaningful participation in global and regional value chains. Currently,
Cambodia’s export base is narrow (mainly garment), SMEs are weak and unregistered,skills and technology are low, infrastructure services (including power) are inadequate or
costly, and labor relations are tense. Cambodia aims to shift from labor-intensive toskill-based industries by 2025. Various components of IDP, which exhibit some repetitionand overlaps, are summarized below.

6Cambodia’s Industrial Development Policy 2015-2025
VisionTargets (for 2025)

Strategy

Priority sectors

Approaches

Policy measuresand action plans

From labor-intensive to skill-based industries by 2025; linking with global
and regional value chain with clusters; competitiveness and productivity,
marching toward modern technology and knowledge-based industry.
(1) GDP share: industry 30%, manufacturing 20%(2) Export diversification: non-garment 15%, agro-processing 12%(3) SME registration and proper accounting(1) Mobilize both large FDI and domestic investment with quality(2) Upgrade SMEs
(3) Improve regulatory environment(4) Coordinate supporting policies(1) New, high-value, creative industries(2) SMEs in pharmaceuticals, construction materials, packaging, furniture,industrial equipment, etc.
(3) Agro-processing(4) Supporting industries (backward or forward linkage)(5) ICT, energy, heavy industries, cultural/traditional handicraft, green
technology- The private sector leads, government coordinates- Structural transformation- Providing support, incentives, markets linked with performance- Greenness and inclusiveness- FDI attraction with improved investment climate and SEZs
- Upgrade SMEs with registration, accounting, and agro-processing- Regulatory environment including trade facilitation, standards, taxes,
industrial relation, etc.
- Supporting policies incl. skills, STI, infrastructure, financial system, etc.

Source: Presentation slides of the Ministry of Economy and Finance, May 28, 2015, summarized by GDF.

A MEF high official further explained to us that the four pillars of IDP were (i) FDI attraction;(ii) SMEs with FDI linkage; (iii) logistics and connectivity; and (iv) legal and policy
frameworks; and IDP’s geographic focuses were (i) Phnom Penh; (ii) Sihanoukville; (iii) area
bordering Thailand; and (iv) area bordering Vietnam. To this end, IDP specifies four key
practical measures to be achieved before the end of 2018 as a milestone—reducing
electricity cost and ensuring stable power supply; preparing and implementing a master planfor transportation and logistics systems; labor market management and skill training; anddeveloping Sihanoukville Province into a model multi-purposed SEZ. In our opinion, thesepillars and focuses are quite appropriate to Cambodia at this development stage—although
we also feel there could be more concrete industrial targets unique to Cambodia8, as well as
8In our preliminary opinion, a vision to become Asia’s high-quality labor-intensive manufacturing leader by
2025 will not be entirely amiss for Cambodia. To attain it, numerical targets and deadlines should be set, forexample, by benchmarking Vietnam for labor productivity and discipline; Thai BOI and Malaysia’s MIDA for
strategic FDI attraction; Thai BUILD and other Thai mechanisms for linkage policy; Malaysia and Taiwan forcomprehensive SME promotion; and selected neighboring countries for logistic cost and time comparison.
Productivity statistics and targets should be created by working with APO and other interested donors.

7even greater stress on industrial human resource and productivity enhancement (in addition
to SME support)9.
The Cambodian government admits that IDP is a broad policy framework only, for which
detailed action plans (implementation strategies) must be created for implementation. We
entirely agree with this assessment. The next important task is to create concrete plans on
who will do what by when, how results should be monitored and evaluated, and how projects
should be financed. New organizations and budget must be arranged, and Cambodian
officials and experts must be trained, if necessary, for execution. Because it is impossible topursue all targets, strategies, and approaches at once, implementation must be prioritizedand sequenced. The matrices of policy measures and action plans attached to IDP stillseem crude and general, and may have to be revised and expanded significantly toenhance implementability and gain sufficient stakeholder support. Domestic and foreignbusinesses, industrial experts, and relevant ministries must be deeply involved in thisprocess. For all these purposes, policy learning based on international best (and worst)
policy practices is imperative for the Cambodian government.
Recently, the Productivity Committee and the Labor Advisory Board were created to address
skill, productivity, and labor market issues raised by IDP. Furthermore, to facilitate theimplementation of IDP, the Advisory Council for the Development of Cambodian Industry willbe established. It is also envisaged that, under CDC, the CIB function will be expanded toinclude coordination and monitoring of IDP implementation, and the CRDB function will be
re-oriented to support industrial development cooperation. The Government-Private Sector
Forum will be enhanced further. It is to be seen how these institutional details will be shaped
and actually function.
According to IDP, Cambodia will graduate from labor-intensive industries into skill-based
ones by 2025. We are under the impression that this time line is a bit too short given theexperiences of neighboring countries and given the fact that Cambodia is still in the earlystage of labor-intensive processing. A MEF official explained to us that national aspirationmust be set high. This is true, but high skills can be pursued in parallel with improvements inmore basic skills of Cambodian workers such as literacy, mindset, and work discipline. We
believe that Cambodia’s advantage in labor-intensive manufacturing should be maintained
for more than a decade by steadily improving labor productivity, worker quality, productdelivery, primary education, etc. Cambodia should take full advantage of labor-intensive
processes before they are abandoned.

Productivity movement, perhaps including kaizen, may be introduced. High wage costs in emerging
economies, AEC, China-plus-One, Thailand-plus-One, Southern Corridor links, and other dynamic trends in
FDI migration should be captured with concrete targets.
9
For low and lower-middle income countries that can receive a large amount of manufacturing FDI, we
recommend a standard policy package for FDI-linked technology transfer consisting of (i) strategic
attraction of FDI; (ii) local enterprise capacity building; (iii) FDI-domestic firm linkage policy; (iv) efficientlogistics; and (v) industrial human resource. Cambodia’s IDP covers much of these grounds while industrial
orientations of Vietnam and Indonesia are quite different from this model.

84. FDI attraction and SEZs
Economic liberalization has proceeded in Cambodia since the 1990s. By now, the country
has a relatively open business climate for investment, foreign exchange, banking, telecom,internet services, etc. Unlike some countries that mobilize SOEs for developing certain
sectors, the Cambodian economy is driven predominantly by foreign and domestic private
firms. There are six (or more) domestic industrial groups in agro-business, telecom, finance,
securities, insurance, property development, cigarettes, trade and distribution, tourism andentertainment, etc. Foreign-advised economic liberalization also led to the adoption ofmarket-based provision of infrastructure services such as power. The results are not totally
satisfactory, however, producing high electricity tariffs and proliferation of small-scale foreign
power companies.
CIB and CSEZB under CDC are the implementation agencies for FDI and SEZ policies,
respectively, and also serve as the main official one-stop service agencies for investors. The
Qualified Investment Project (QIP) status, granted to most manufacturing projects and somehigh-value and/or large-scale service projects, is the main incentive scheme of Cambodia
offering exemptions of corporate income tax (up to nine years), import duties, andvalue-added tax. The type and level of investment incentives in Cambodia are, by and large,
standard and moderate in comparison with other countries. For Japanese investors
equipped with necessary conditions, obtaining QIP status is not a big problem, and one-stop
services at SEZs or business consultants can assist them if necessary. For small investors,
establishing offices, shops, and restaurants is easy with little procedural hassles, unlike
some countries that set minimum capital requirements for foreign investors.
Cambodia has 34 Special Economic Zones (SEZs) of which 12 are operational. They arelocated in Phnom Penh, Sihanoukville, and areas bordering Thailand (Poipet, Koh Kong)
and Vietnam (Bavet). The largest concentration of Japanese manufacturing FDI is in Phnom
Penh SEZ (PPSEZ) managed jointly by Cambodian (78%) and Japanese (22%) capital. It
has one-stop service in Japanese language, water supply, waste water treatment, a power
generator, a dry port, and a Japanese restaurant. In principle, CSEZB provides one-stop
service at each SEZ staffed with the officials of relevant ministries and agencies (such as
CDC, customs bureau, MOC, MOL). Not all SEZs have full support such as PPSEZ,
however. Other than such services provided by zone operators, SEZs do not offer any
additional legal privileges or incentives beyond QIP, which means that firms with QIP status
can enjoy the same incentives wherever they are located. In addition, there is the SEZ
Trouble Shooting Committee housed in CDC to promptly settle issues occurring in SEZs.
Japanese firms in PPSEZ (40 firms as of May 2015) are mostly engaged in labor-intensive
processes in electronics, machinery, garment, leather, etc. They include Minebea (small
motors and liquid-crystal display backlight panels), Sumitomo Wiring Systems (automotive
wire harnesses), Ajinomoto (food processing), and Denso (automotive parts). According to9the CEO of PPSEZ, presence of even one large Japanese firm stimulates Japanese SMEs
to come to Cambodia in droves10.
The JETRO Office was established in Cambodia only recently, in 2010. Earlier, JICA experts
and private consultants provided necessary information for Japanese investors. JICA also
supported the capacity development of CDC and established Japan Desk at CDC where aJapanese expert was assigned. The Japanese embassy, JETRO, the Japanese Business
Association for Cambodia, and JICA-supported Japan Desk have collaborated closely toprovide good conditions for Japanese firms. Furthermore, there are a large number ofJapanese business consultants, labor-exporting agencies to Japan, and Japaneserestaurants in Cambodia. Three Japanese megabanks also have representative offices in
Cambodia. Aeon Mall, a large Japanese shopping center, opened in Phnom Penh in 2014.
Japan is not the largest investor in Cambodia, however. China is by far the largest withcumulative registered FDI in the past two decades of over $11 billion (mostly real estate andenergy), followed by Korea (mostly real estate), Malaysia, and the UK. Japan is No.11 with
only 1,150 projects worth $713 million (up to 2014 including cancelled projects), but it is thedominant investor in SEZs as well as in manufacturing. Japanese QIP firms are about 100 in
number, and their entry is accelerating from around 2010.
Japan is the only investing country that has formal and regular investment climate
discussions with the Cambodian government. Demands and requests of Japanese FDI firms
are collected by the Japanese Business Association of Cambodia (JBAC), and bilateral
discussions are held twice yearly to solve raised issues at the Japan-Cambodia
Public-Private Sector Meeting co-chaired by the Secretary General of CDC and theJapanese Ambassador. Some of the recent issues include (i) the high cost and unreliablesupply of power; (ii) rising wages and low quality of labor (see below); (iii) non-applicability ofinvestment incentives to project expansion; and (iv) non-transparent and complicatedadministrative procedure including taxes and customs clearance.
5. The wage and productivity problem
Cambodia has a young and mostly rural population with 75% of the people under the age of35, a condition generally suitable for light manufacturing. However, Japanese firms reportlabor-related problems regarding availability, quality, and cost.
Factory workers must often be recruited in rural areas because they are no longer easy tofind in urban areas. Some firms in PPSEZ build or rent dormitories for migrant workers, andother (mostly non-Japanese) firms locate in rural areas for the ease of worker recruitment.
Labor-intensive processes normally use young female labor, but job hopping is rampant
among such workers in pursuit of slightly more favorable salaries or working conditions.
10This phenomenon is called the Queen Bee effect in Singapore, and the Canon effect in Vietnam.

10Footloose workers are observed in many developing countries and not unique to Cambodia.
One unfortunate feature of Cambodia is the low quality of labor. The majority of young
factory workers are primary school graduates or dropouts, or people who never went toschool. As a result, many are illiterate, unpunctual, and lack teamwork, discipline, andcooperative spirit. A Japanese firm in PPSEZ confided that it was surprised to discover thelack of basic attitude and mindset in Cambodian workers, which was far worse than in India,
Brazil, or other locations in the world. Some factories need to train workers with very basics(reading, attitude, etc.) before they are given operational training. In contrast, in Vietnam,
virtually all factory workers are high school graduates who are literate and skillful. Chinese
workers are even more productive than Vietnamese workers. Cambodia has a long way tocatch up in labor quality.
Another headache is rapidly rising wages in the absence of corresponding improvement inlabor productivity. During the last two decades, labor productivity in Cambodia grew 3-5%
per year on average according to the Asian Productivity Organization (APO)11. Meanwhile,
the monthly minimum wage for textile workers was revised upward from $40 (1997) to $61(Oct. 2010), $80 (May 2013), $100 (Feb. 2014), and $128 (Jan. 2015). Adjustments in thelast few years were particularly large, with an annual average increase of 19% from Oct.
2010 to Jan. 2015. Recent wage decision was made amid labor disputes and pressure fromlabor unions. Wage increase has outstripped labor productivity by a wide margin. At $128
per month, the minimum wage in Cambodia is now higher than the minimum wage in therural areas of Vietnam12. If such wage pressure continues, Cambodia’s labor advantage willsoon be lost.
The Cambodian government as well as foreign investors are alarmed. Effort to de-politicize
wage setting is beginning. Previously, the government decided the minimum wage after
inter-ministerial consultation led by the Labor Minister but without reference to hard facts
and analysis. The Productivity Committee was established in January 2015 to collect dataand propose a solution. It is hoped that the minimum wage will from now on will be based on
productivity, competitiveness, and other economic factors rather than just workers’ demandfor better life13.
We heard from more than one Japanese firm that Prime Minister Hun Sen’s April 2015
pledge that the minimum wage would be $160 by 2018 (which implies an average annual
increase of 8% in the next three years), if actually kept, would be highly welcome. This will
impart predictability to business management.
11

Average annual labor productivity growth of Cambodia, as reported in APO Productivity Databook 2014(p.61), was 4.3% (1990-95), 3.4% (1995-2000), 3.6% (2000-05), and 5.0% (2005-12).
12
As of Jan. 2015, Vietnam has four minimum wages from urban to rural: $150, $140, $125, and $104.
However, it should be noted that social security contribution per worker is at present much higher in
Vietnam than in Cambodia.
13
A wage setting mechanism that reflects productivity performance is also requested by entrepreneurs inIndonesia, a country that similarly suffers from rapid increases in minimum wage. See GDF, Report on theIndonesian Mission, July 2014.

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Given the situation above, Cambodia needs to overcome many problems to maintain thecurrent labor advantage. First, reliable statistics on wages and labor productivity must be
produced and analyzed. Second, a rational wage-setting process that balances productivity
and workers’ aspiration must be agreed and practiced. Third, labor productivity must becontinuously improved, for which (i) benchmarking rival countries and setting numericaltargets, (ii) introduction of kaizen and national productivity movement, and (iii) a social
contract among government, management, and labor to jointly make effort to improve laborproductivity, should be considered. Fourth, primary education and technical training must be
upgraded nationwide to equip workers with basic attitude, discipline, and literacy. High skills,
technology, and knowledge cannot be taught unless workers have the right aptitude.
6. SME promotion
Following the RS I, the SME Development Framework was formulated in 2005 by the SME
Sub-committee with ADB support, but it was just a broad direction without implementableaction plan. More recently, in March 2015, a new document (Cambodia’s SME Promotion:
SME’s Initiative for Cambodia Brand of Quality: Policy Framework) was drafted by MIH with
JICA support, to be deliberated by the SME Sub-committee. While this document provides acomprehensive policy menu referential schemes, clear prioritization and sequencing ofactions must be specified in order to make it implementable. SME promotion is one of thecore issues in IDP, but identifying policy details remains a future task. At present Cambodia
has no SME law. Donor-supported projects have not yet been institutionalized in the
Cambodian government. Up to now, we must say that there have been few effective policy
measures to develop Cambodian SMEs14. SME promotion in Cambodia is in a very earlystage. Much work and cooperation will be needed to implement policies effectively.
As the first step, the definition of SMEs must be given in a way consistent with Cambodia’s
development objectives as well as international practices. Without an agreed definition, datacollection, analysis, and policy formulation are hardly possible. An SME law or a master planthat guides SME policy must be crafted. Good practices in other countries should be studied,combined, and modified to fit Cambodia’s reality. The SME Sub-committee must be
revitalized to do these works. Foreign technical cooperation may be sought if necessary.
Globally, standard measures for SME promotion are well-known and include: (i) legal andpolicy frameworks; (ii) human resource development including managers, engineers, andworkers: (iii) enterprise capacity building in corporate strategy formulation, technology,
marketing, export, accounting, labor management, IT, etc.; (iv) financial access; (v) building
networks, forward and backward linkage, clustering, business associations, etc.; and (vi)startup support, innovation, and R&D. Within each category there are many sub-measures
14

Some measures proposed in the 2015 document, such as the lease law, credit guarantee for rice millers,
and the collateral systems, have been introduced. But these still remain modest and random in view of theentire policy structure required for SME promotion.

12and further items. The whole universe of SME support as practiced by such countries asJapan, Taiwan, Singapore, and Malaysia is vast and complex. A latecomer country such as
Cambodia needs to be selective and modest in initiating SME promotion.
At present the main issues in Cambodia’s SME policy are registration and accounting. Only
30,000 are formally registered among 514,000 SMEs in Cambodia (MOP data for 2014),
which makes it difficult for government to reach out and analyze SMEs worthy of support.
The proposed one-stop registration center at MOI may accelerate SME registration. But thisis only a small beginning for SME promotion. After registration and accounting issues are
solved, there are many more things to be done to proactively support SMEs as listed above.
Generally speaking, SME policy has two purposes: (i) job and income generation for poverty
reduction, and (ii) supporting selected SMEs for value creation and competitiveness. Bothare necessary for Cambodia, but high officials we met made it clear that the main objectiveof SME policy in Cambodia was the latter, namely the creation of competitive SMEs with FDI
linkage. We believe this is an appropriate choice.
7. Development of Sihanoukville
Apart from indirect sea access through Thailand and Vietnam, Sihanoukville, situated in thesouthern coast, is a critically important logistic gateway to Cambodia. The government plans
to develop Sihanoukville as a multi-purpose SEZ and a regional transport hub hosting
manufacturing, transport, services, tourism, and residential areas. High officials we met
explained to us the current status of this vision. A deep-water container port has been builtwith Japanese cooperation and is operational. The port has gantry and mobile cranes,
stackers, storage and warehouses, etc. with the total cargo handling of 3 million tons in 2013.
Bulk freight port must be added and container port capacity has to be expanded in the
future.
Using Japanese yen (ODA) loans, Sihanoukville Port SEZ (SPSEZ) was also constructedadjacent to the container port and opened in 2012, with the total area of 70ha and thefactory area of 45 ha (48 plots). As of now only three tenant firms came to SPSEZ. Slowsales is blamed mainly on high cost, while some also mention the lack of proper customer
services, plot design, and over-specification. Separately, Sihanoukville SEZ (SSEZ) was
built with Chinese cooperation at 12km from the port with a planned area of 1,113ha, andbecame operational in 2012.
Regardless of the current performance of SPSEZ, the critical importance of Sihanoukville,
located along the Greater Mekong Subregion (GMS) Southern Coastal Corridor, for thedevelopment of Cambodia remains unquestionable. Sihanoukville is still under construction.
Development must incorporate not just the city and port of Sihanoukville but entire Preah
Sihanoukville Province or even beyond. A comprehensive regional development masterplan and urban planning must be drawn up or revised, highways and other road links to
13Phnom Penh and other locations must be built, soft components such as trouble-freecustoms clearance and fast handling systems must be installed, and marketing for FDI andtourism must be beefed up.
With proper design and execution, Sihanoukville has a chance of becoming a large
industrial and urban area similar to the Eastern Seaboard Development of Thailand, or evenbetter because it has non-industrial functions as well. For this purpose, a powerful high-level
ad hoc coordination mechanism chaired and supervised by the Prime Minister, like theEastern Seaboard Development Committee of Thailand in the 1980s, may prove effective.
8. Concluding remarks
Cambodia has come a long way. Starting from the position of a post-conflict fragile state
dominated by donors, it recently began to regain policy autonomy and establish policy
ownership. Broad directions set in IDP, as explained to this mission, are reasonable andwell-focused, unlike long and unimplementable wish lists found in some countries. The
mindset and collective decision making among top technocrats seem to be working for
growth acceleration. We applaud the progress Cambodia has made in the last decade in thearea of industrial policy formulation.
However, there is a long and winding road ahead. Broad directions must be concretized instrategies and action plans, proper staff and organizations must be prepared, financial
resources must be found, and progress must be monitored and adjusted. Implementation isa challenge for all aspiring governments. We hope Cambodia will successfully solve manycoming issues in the implementation process. Policy learning must be enhanced andsystematized. Even after implementation, the question of how much ultimate impact thepolicy has had must be asked.
This is a critical historical moment for Cambodia, in which policy capacity acquired in thenext stage will largely determine whether the nation will continue to march to high income in
the future or become stuck in a middle income trap. Japan as an important economic partnerof Cambodia, especially in manufacturing, should further align its economic cooperation andinvestment with IDP’s priorities. In addition to discussing investment issues with CDC, Japan
should start regular policy discussion with top leaders of Cambodia, set clear cooperation
targets which are monitorable, invite appropriate Japanese firms and provide concrete
cooperation projects to realize some of the IDP’s objectives, and review their progress andmake adjustments as necessary.
Japan’s cooperation in the past has emphasized infrastructure, private-sector development,
agriculture, governance, and social areas such as water, health, education, and land mines.
It should now add kaizen and productivity, upgrading industrial human resource, soft andhard logistic efficiency along the Southern Corridor, comprehensive regional development
encompassing Sihanoukville and the Southern Coastal Corridor, and other concrete14

industrial support measures in line with IDP.

Attachments:
1. Mission schedule
2. Organizations/persons visited
3. List of information collected15

Attachment 1

Mission Schedule
Mission Members
Kenichi Ohno

Professor, National Graduate Institute for Policy Studies (GRIPS), Tokyo, Japan

Izumi Ohno

Professor, National Graduate Institute for Policy Studies (GRIPS), Tokyo, Japan

Akemi Nagashima

Research Associate, National Graduate Institute for Policy Studies (GRIPS), Tokyo, Japan

Mission Schedule
Date

Time

26 TuePM Flight from Bangkok to Phnom Penh

Activity

AM Supreme National Economic Council (SNEC)
27 WedPM Council for the Development of Cambodia (CDC)
AM Ministry of Economy and Finance (MEF)
28 ThuAM JETRO Phnom Penh
PM Ministry of Industry and Handicraft

MAY
AM O&M (Cambodia) Co.,Ltd
AM Sumi (Cambodia) Wiring Systems Co., Ltd.
29 FriPM Phnom Penh SEZ Co.,Ltd
PM Young Entrepreneurs Association of Cambodia (YEAC)PM Flight to Haneda (Transit at Bangkok)

30 SatAM Arriving at Haneda airport

16

Attachment 2

Organizations/Persons Visited
Organization

Ministry of Economy and Finance(MEF)

Supreme National Economic Council(SNEC)

Name

Position

H.E. Vongsey Vissoth

Secretary of State for MEF and Vice Chairman of SNEC

Ung Luyna

Deputy Director, General Dept. /Budget for MEF and amember of SNECEng Touch

Personal Assistant to Secretary of State

Lay Sopheak

Personal Assistant to Secretary of State

Sieng Chamnan

Deputy Director, General Dept. /Economic and Public
Finance Policy

Heng Socheat

Officer, General Dept. /Economic and Public Finance Policy

Khut Vanne

Officer, General Dept. /Economic and Public Finance Policy

Choum Rottanak

Officer, General Dept. /Economic and Public Finance Policy

H.E. Kalyan Mey

Senior Advisor for SNEC and Chairman for Royal Universityof Phnom Penh

H.E. Sok Chenda Sophea Minister attached to the PM/Secretary General
Council for the Development of
Cambodia (CDC)

Lim Visal

Deputy Director, Dept. Public Relations and Promotion ofPrivate Investment

Unvoanra Nut

Assistant to Minister attached to the PM/Secretary General

Yuji IMAMURA

Advisor for CIB and CSEZB Japan Office

H.E. Heng Sokkung

Secretary of StateSon Seng Huot

Under Secretary of State
Director General, General Department of SME andHandicraft
Deputy Director General, General Department of SME andHandicraft
Director General and Board Chairman of General
Department/Industry Phnom Penh Water Supply Authority(PPWSA)

Peou Vorleaks
Ministry of Industry and Handicraft(MIH)

Yea Bunna
Soem Nara
Masayuki ISHIDA

Young Entrepreneurs Association of
Cambodia (YEAC)

JICA SME Project Leader
President for YEAC and CEO& Co-founder of G-Gear
Co.,Ltd
Managing Partner, BDtruS Research & Business
Consultancy

Oknha Sok Piseth
EK Sopheara

Phnom Penh SEZ Co.,Ltd

Hiroshi UEMATSU

CEO

O&M (Cambodia) Co.,Ltd

Junichiro TOMIZUKA

President

Takahisa WAKISAKA

President

Kenichi ONOGI

General Manager, General Affairs Department

Masashi KONO

Chief Representative

Sumi (Cambodia) Wiring Systems Co.,Ltd.
JETRO Phnom Penh

17

Attachment 3

List of Information Collected
SourceMinistry of Economy
and Finance (MEF)

Council for theDevelopment of
Cambodia (CDC)

Title
Presentation Documents: Cambodia Industry Development Policy 20152025, 6 March 2015
Presentation Documents: Three Key Points for Investment in Cambodia,
June 2011 (Japanese)
Presentation Documents: Investment environment in Cambodia, March
2015 (Japanese)

Authors/Publisher
Approved by Council of
Ministers
Mr. Yuji Tanzaki, JICA expert
at CDC Japan desk
Mr. Taro TANZAKI, JICA expert
at CDC Japan desk

Guidebook for Cambodia investment, 2013

CDC (Translate by JICA)

Brochure: Sihanoukville Port SEZ (Japanese)

Sihanoukville Port SEZ and
JICA

Brochure: Investing in The Heart of Dynamic Southeast Asia

CDC

Ministry of Industry andIndustrial Development Policy 2014-2024 (First Draft as of 11 March 2014) MIH
Handicraft (MIH)
Phnom Penh SEZ
Co.,Ltd
JETRO Phnom Penh

”Welcome to PPSEZ -Communicated to the future PPSEZ" (Japanese)

PPSEZ

Magazine: Cambodia Business Partners (Japanese)

CLD Marketing Partners

Presentation Documents: Cambodia Actual situation such as Economy,
Trade, Investment, and Japanese FDI (Japanese)

JETRO Phnom Penh

Cambodia's SME Promotion -SME Initiative for Cambodia Brand of
Quality- Policy Framework, March 2015
Presentation Documents: SME Promotion Policy Development Challenges for the SME base Policy-, 7 April 2015

MIH (English Translate by
JICA SME Project)
SME Secretariat on behalf of
SME Sub-committee
MIH and JICA SME Promotion
Policy Formulation Project
Mr. Masayuki ISHIDA, JICA
SME Project Leader

Rectangular Strategy Phase III, 7 September 2013

SNEC

Guidelines for formulating National Strategic Development Plan (NSDP)
2014-2018, April 2013

Ministry of Planning

National Strategic Development Plan (NSDP) 2014-2018, 17 July 2014

Ministry of PlanningSoutheast Asia Regional Programme, November 2014OECD

Active with Southeast Asia, May 2014OECD

ASEAN SME Policy Index 2014 -Towards Competitive and Innovative
ASEAN SMEs-

OECD

Presentation Documents: Investment Seminar in Tokyo, Japan "METI,
Embassy of Cambodia to Japan, JETRO Phnom Penh, JDI, NIKKOKINZOKU, and HITACHI", November 2014 (Japanese)

Japan Development InstituteCambodia's Industrial Development Policy 2015-2025, March 2015
Small and Medium Enterprise Development Framework, 29 July 2005

JICA project on SME
Promotion

Presentation Documents: Investment Seminar in Nagoya and Hamamatsu,
Japan "CDC, JETRO Phnom Penh, Toyotsu, Deloitte, and JBIC",
METI Chubu
February 2015 (Japanese)

OthersInvestment environment in Cambodia, April 2014

JBIC

Presentation Documents: Growing Cambodia, April 2015 (Japanese)

JICA

Presentation Documents: CJCC (Japanese)

JICA

Presentation Documents: Sihanoukville Port SEZ (Japanese)

JICA Phnom Penh

Presentation Documents: Making Industrial Development Strategy for
Cambodia, 26 April 2012
Presentation Documents: Industrial Policy for Cambodia -Policy Planners’
Guides-, September 2012
Presentation Documents: Industrial Policy Designs for Cambodia, June
2012

Mr. Shinji ASANUMA,
Hitotsubashi University/JICA
Mr. Shinji ASANUMA,
Hitotsubashi University/JICA
Mr. Shinji ASANUMA,
Hitotsubashi University/JICA

18