- Each dimension suggests, for distinct reasons, a sense of the unsustainability of growth. This could be because past growth was a one-off event, based on historical opportunities, or based on running down pre-existing assets. Alternatively, it could be because the nature of the growth, through sector-specific arrangements, makes it difficult to scale up. Economic developments in 2008/09 further underscore these vulnerabilities.

- On the other hand, each dimension highlights some elements of a growth strategy that are in place. For instance, a few connections to global markets have been made and the importance of macroeconomic stability is now adequately factored in by policymakers. Stakeholders have established a track record of problem-solving, which enabled the growth of sectors like garments and tourism.

- No single dimension can by itself explain Cambodia’s growth experience. The view that growth has been entirely the result of laissez-faire and the liberalization of the 1990s is not credible: otherwise, growth would have been much more broad-based. The view that governance constraints across the board prevented growth is at odds with the growth performance. Private sector has been able to strive over the past ten years. Yet, weak governance – beyond its impact on service delivery and citizens’ daily life – can explain the lack of diversification, hence the fragility of growth.

# **IV. Constraints to Sustained Rapid Growth**

32. **In Cambodia, a low-income country, everything might be seen as a constraint on growth – yet, as a low-capacity country, prioritization is key** . This section builds on the framework of “growth diagnostics” developed by Haussman, Rodrik and Velasco (2005) to identify constraints that explain the characteristics of Cambodia’s economy (Section II and III), in particular its low levels of investment and low diversification. Box 2 discusses the methodology in more details. It highlights in particular a limit of the methodology, which is that some constraints might depend on the diagnostic about the country’s comparative advantage and the sector that are expected to grow: to show this point, Box 3 focuses on constraints on agriculture.

# **Access to Finance**

33. **Although Cambodia’s financial sector is under-developed, it has responded to growth since 2005** . Less than one in five firms has a loan (Figure 9). But, after GDP growth accelerated in the early 2000s, the financial sector responded, including through innovations brought by foreign banks. The financial sector is now at a level of development commensurate with the country’s income. Liquidity (measured

**Figure 9: Few firms have access to the banking sector and, still, few are constrained by it**

<!-- Start of picture text --> Do you have a loan?<br>No: 79.3% Yes: 20.7%<br>Never applied: 96.8% Rejected:<br>3.2%<br>Too complex: 4.8%<br>No need: 86.3% Collateral requirts: 4.9%<br>High interest rates: 4.0%<br> Response to the question: “has your firm a loan?”. Source: World Bank (2008d).<br><!-- End of picture text --> for instance by the loans to deposits ratio) remained high until late 2008. Real interest rates were negative in 2008. If anything, the limited supply of credit has constrained investment in construction (with investment and the real interest rate showing a negative correlation, 14