for some well-targeted subsidies.

# **V. Conclusion**

56. **Cambodia has achieved a remarkable decade of rapid growth, but has been hit by the global economic crisis** . The remarkable performance can be traced to a mix of historical circumstances, favorable initial conditions, and useful policy choices. Additional analysis (World Bank, 2009) suggests that Cambodia has the potential to sustain rapid growth. However, this performance had highlighted vulnerabilities (lack of product and export diversification, lack of domestic savings) which have been further revealed by the global economic crisis. This external shock has severely impacted the garment and, to a lesser extent, the tourism sectors, putting pressure on the labor market.

57. **A number of priorities emerge from this analysis** . While progress would be useful in most areas, certain issues should be given priority to realize Cambodia’s growth potential.<sup>19</sup>

- In the short term, the growth strategy is likely to revolve around (i) mitigating the impact of the global economic crisis and (ii) seizing potential opportunities (e.g. trade with ASEAN, see World Bank, 2009). In that context, the binding constraint analysis suggests that immediate constraints that are amenable to quick actions include macroeconomic stability (but, the appreciation of the real exchange rate, while a major issue, has few instruments to be addressed), trade facilitation, and reducing labor disputes: this would be good ways to maintain the viability of the garment industry and seize the opportunity of regional trade and integration. Some coordination devices to enable a supply response to higher prices of rice (e.g. farmers’ association, interventions to fix the fertilizer market) could pay a rapid dividend, especially as agriculture is one of the few existing sectors that are less dependent on external demand.

- The second part of the growth strategy, over the next couple of years, is the diversification in the country’s existing comparative advantage. To accomplish this, the priority is to reduce coordination problems (most likely by reducing the unnecessary regulatory burden as well).

- Finally, the longer-term growth objective should be to upgrade Cambodia’s endowment. This is likely to require a strategy to upgrade education and infrastructure, while mobilizing more domestic savings.

58. **This three-part growth strategy suggests an encouraging future for the development of Cambodia** . The context early 2009, as well as the serious governance issues that the country has been facing over the past decade, would invite to a cautious conclusion about Cambodia’s growth potential. Nevertheless the foregoing analysis suggests that the country has achieved rapid growth and gradually alleviated key constraints. Perhaps the main insight of the analysis is that many of the possible constraints on Cambodia’s growth have long been present, without actually constraining growth significantly (and the economy has weathered many shocks in the past): this is encouraging. At the same time, the nature of the growth process is changing and

> 19 The full report (World Bank, 2009) discusses a possible growth strategy with three different time horizons. The report also focuses in particular on three policy instruments: the macroeconomic policy mix (and financial sector policies), the fiscal policy, and industrial policy.

25