Recent evidence indicates Cambodia is undergoing significant structural transformation and export diversification in the post-Covid recovery. The recent 2024 World Bank report on Cambodia highlights the export diversification and structural shift in the industrial activities in the country in the first quarter of 2024.

The economic growth is forecasted to be 5.8 per cent in 2024 and rise to 6.1 per cent in 2025, thereby indicating the resilience of the Cambodian economy compared to other ASEAN member countries to external regional and global economic slowdowns since 2022.

Export diversification and structural transformation post-Covid 

The country’s open economic strategies, driven by the Rectangular Strategy since 2004 and now transitioning to the Pentagonal Strategy in 2024, have resulted in strong structural and economic transformations within the domestic economy.

They are focused on regulatory and institutional reforms, maintaining market and rule-based trading regimes, adopting best practices, seeking new markets and promoting trade harmonisation to reduce border and behind-border costs. This is achieved through regional and multilateral free trade agreements (FTAs) such as the ASEAN FTA (AFTA), the Regional Comprehensive Economic Partnership (RCEP), the ASEAN plus one FTAs (with Australia, New Zealand, China, Japan, South Korea and India) and bilateral FTAs with China, Korea and the United Arab Emirates (UAE). These agreements have a strong impact on export diversification and industrial structural transformation.

During the post-pandemic recovery from 2022 to 2024, we have observed export diversification in goods, sectors and both regional and global markets. Based on the top 20 export markets of Cambodia from 2019 to 2024, the analysis reveals a significant diversification of its international sales.

In the first quarter of 2024, exports overall increased by approximately 15 per cent. Exports to the US increased by about 5 per cent during the same period and remains the dominant export market for Cambodia, although its share has decreased from 40 per cent in 2022 to 34 per cent in the first five months of 2024.

Based on the World Bank report, In the first quarter of 2024, there has been diversification and expansion of exports of manufactured goods, as well as services exports driven by the recovery in tourism. Tourist arrivals increased by 22.5 per cent year-to-year, thereby reaching 84.2 per cent of arrivals recorded during the same period in 2019.

We also observed the expansion of product exports which increased by 17.2 per cent year-to-year, reaching $6.3 billion. The exports of goods were driven by garment, travel goods and footwear to the US and EU. In addition, we also observed export expansions in higher value-added GVC (global value-chain) goods, including electronic, electrical, furniture, leather and wood products.

The expansion of foreign sales highlights the important role of agricultural exports as a key emerging activity in the country. Cambodia is becoming one of the main exporters of agricultural products and is now recognised as one of the top rice producers in the world.

In the first quarter of 2024, exports of agricultural commodities experienced substantial year-on-year growth of 28.1 per cent, totaling $1.1 billion. This accounted for 17.4 per cent of total exports, a significant increase from 6.3 per cent in 2013, and positioned agricultural commodities as the second largest export category, after garments, which reached $2 billion.

The report highlights that agricultural sales to international markets have increased by nearly fourfold over the past decade. As of 2022, Cambodia ranked ninth among global rice producers and is now emerging as a major agricultural exporter.

In the first quarter, we observed a significant increase in agricultural exports, reaching $1.39 billion and representing 25.8 per cent of total goods exports. The top five agricultural products exported were cassava ($422 million), cashew nuts ($274 million), milled rice ($134 million), rubber ($127.5 million) and furniture ($100 million).

These products experienced year-on-year growth rates ranging from 6.4 per cent (milled rice) to 46.4 per cent (cashew nuts). In 2023, agricultural exports amounted to $4 billion (16.7 per cent of total exports), making it the second-largest export category after garments, which accounted for $7.8 billion (33.5 per cent).

We also observed the diversification of export market destinations in line with the regional FTAs such as the RCEP and AFTA. Cambodia's export market showcases a diversified portfolio in the post-Covid era, with a notable focus on major regional markets. Based on the statistics of the top 20 export markets in the first five months of 2024 from the General Department of Customs and Excise (GDCE), we can see how the country has diversified its exports across five major markets.

The ASEAN market has experienced a substantial increase, from 6 per cent in 2019 to 23 per cent in the first five months of 2024, signifying a growing importance of intra-regional trade. While historically below the EU market, ASEAN surpassed the EU in 2023 to become the second-largest regional export market. Surprisingly, this lead has widened significantly, with a 9 per cent difference in the first five months of 2024.

The ASEAN Plus market, comprising trade between Cambodia and ASEAN trading partners such as Japan, China, Korea, India, Hong Kong and Australia, has remained relatively stable, fluctuating between 15 per cent and 18 per cent from 2019 through the first five months of 2024. However, it surpassed the EU market in 2023, signifying trade growth facilitated by the AFTA with trading partners, the RCEP and recent bilateral agreements with China and Korea.

The European market share has declined sharply by approximately 10 per cent, from 24 per cent in 2019 to 14 per cent in the first five months of 2024. This decrease is due to a combination of factors, including a slowdown in demand within the EU and increased competition from other exporting countries like Vietnam and Bangladesh.

The "others market" category has seen a slight decrease, suggesting a consolidation of exports towards major markets. Overall, Cambodia's export market has diversified, with a notable shift towards ASEAN countries, while its share of the US and EU markets has decreased. However, the US remains the largest export market for the country.

Implications and challenges in post-Covid reforms

The above highlights that Cambodia is in the right growth path in terms of diversified export markets and industrial structure to manage regional and global economic shocks and prepare for least developed countries (LDC) graduation expected in 2029. However, there are several implications and challenges for the next phase of growth of the Cambodian economy in the post-pandemic recovery. 

a.   While the open economic strategies of Rectangular and Pentagonal Strategies have yielded initial positive results and a resilient economy, the momentum for market-based and rule-based reforms are critical to fully maximise and optimise these open economic strategies on the domestic economy. The rising protectionism from the US-China trade war, strategic alliances and other global conflicts have increased the inward-looking policies in global trading activities. It is critical to maintain market-based and rule-based market access through multilateral and bilateral FTAs to develop horizontal and vertical diversification of GVC activities. Seeking new markets and resources in South Asia, Central Asia, Latin America, Africa and Central European countries will also be crucial. Evidence indicates that countries with a large number of multilateral and bilateral FTAs have greater tendency to diversify their markets and also create more resilience to external shocks. Vietnam has 15 FTAs signed and in effect in 2024, including with the EU, compared to 10 FTAs signed and in effect for Cambodia.

b.   The impact of open economic strategies is optimised through trade and investment facilitations. Recent studies highlight that Cambodia could experience strong and positive growth impact from the RCEP through trade and investment facilitation in reducing behind-border trading costs in logistics, custom liberalisation and services liberalisation such as logistics, aviation and transportation. There is a need to improve the overall trade and investment facilitation in the Cambodian economy as it is ranked low (group rank) at 115 out of 139 countries in the 2023 Logistics Performance Index (LPI) of the World Bank. The neighbouring countries of Thailand and Vietnam are ranked at 31 and 43 respectively in the 2023 LPI. The new investment law, the Logistic Masterplan to increase road, highway and water connectivity, the building of two new airports in Siem Reap and Phnom Penh and the Funan Techo Canal project are expected to improve trade and investment facilitation in the short and long-run and improve the logistic infrastructure and connectivity of Cambodia to the region.

c.   The emergence of services exports as one of key drivers of export growth is critical to maintaining sustainable export and economic growth in Cambodia. Although, the increase in services exports is driven by the rise in tourist arrivals, the importance of modern services such as banking and finance, e-commerce, data management services, logistics and aviation, driven by new technologies such as digitalisation and telecommunication infrastructures, are critical to develop competitive service sectors in the next phase of growth. There is a need to review and renew the strategies in the modern services sector.

d.   The implications of agricultural export diversification is very critical for the Cambodian economy to balance the economic development between rural and urban sectors. The growth of agricultural exports is expected to have more trickle-down effects in increasing the income and standard of living in the rural sector. The growth of the agricultural sector and exports provides the base to develop strong third and second-tier cities linked to rural sector development, creating service and city linkages and support GVC activities and urban agglomerations in the urban sectors. The growth of third and second-tier cities will have a strong impact on middle-income growth in the country, creating greater domestic turnover and activities, thus increasing the overall resilience of the Cambodian economy.

e.   The key challenge for Cambodia as highlighted by the World Bank’s report is the development of human capital, as a large share of workers in Cambodia have primary and lower education and lack critical skills to support the emerging and competitive industries from the structural transformation of domestic industries. This is the key critical issue that requires both the private and public sector to work closely to address the economic and social issues emerging from the lack of critical future skills for the next phase of growth of the Cambodian economy.

Shandre Mugan Thangavelu is head of the Jeffrey Cheah Institute for Southeast Asia, Sunway University, and researcher at the Institute for International Trade, University of Adelaide. The views expressed are those of the author.