# **II. Country Background and Economic Situation in 2008**

6. **Cambodia is a small, coastal economy in Southeast Asia** . Located on the coast bordering Thailand and Vietnam, it has abundant land (177,000 sq. meters), an exceptional biodiversity, and outstanding cultural heritage (the temples of Angkor Wat in particular). Its population, 13.4 million in 2008, is young and homogenous (almost entirely Buddhist, with some very small indigenous communities in the mountain areas mainly and a few other small minorities). The demography has been driven by history: more than 2 million Cambodians died during the Khmer Rouge period; a first baby boom followed in 1980-81; a second baby boom happened in the early 1990s as peace was settling in. In parallel, Cambodia experienced an early demographic transition. This means that in recent years the dependency ratio – ratio of young and elderly over the working-age population – has been decreasing steadily, contributing to increasing growth per capita.

7. **The political system has been stable in recent years** . Following the Paris Peace Agreement of 1991 and the UN administration until 1993, the 1990s have witnessed continued internal tensions (both for elections and for continued military operations). With the fall of the last pockets of Khmer Rouges in the late 1990s, the country has reached a steady-state with a dominant party – the Cambodian People’s Party (CPP), with Prime Minister Hun Sen in power since the mid-1980s – winning all general elections, including the most recent in July 2008. The political equilibrium is heavily influenced by the post-conflict situation, including its significant centralization (to ensure control during difficult times) and patronage-client networks developed for stability purposes. Importantly, CPP electoral successes seem to be increasingly linked to the regime’s capacity to deliver economic development, and infrastructure in particular.<sup>1</sup> 8. **Cambodia’s economy – and most of the growth over 1998-2008 – consists of four sectors: garments, tourism, construction and agriculture** . The industry and services sectors accounted for 4.5 and 4.8 points of growth per annum respectively (against 2.0 for agriculture, although the contribution of agriculture was above this average in recent years).<sup>2</sup> As a result, the economy has undergone a profound transformation, with agriculture by 2007 ranking behind both industry and services in terms of value-added (although still first in terms of employment, Figure 1). The pace of this transformation appears consistent with that of countries that experienced Sustained Rapid Growth (SRG)<sup>3</sup> over the past half-century. In fact, very few jobs were created in agriculture. But significant jobs were created in higher-productivity sectors such as industry and service. At the same time, productivity gains in these higher-productivity sectors were limited, while increasing yields were achieved in agriculture (in other words, the gap in productivity across sectors was reduced).

**Figure 1: Cambodia’s economy has started its transformation**

a/Share of GDP (%) b/ Share of Employment (%)

> 1 This is evidenced by a series of polls conducted by the Independent Republican Institute, showing that most Cambodians feel their country is moving in the right direction. This is thanks to the development of infrastructure and despite serious concerns about corruption, according to the polls.

> 2 The contribution of services includes the growth of tax on products net of subsidies.

> 3 This refers to the countries studied in Growth Commission, 2008.

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