The Impact of Global Economic Crisis on Cambodia Economy and Poverty

1. INTRODUCTION

The world financial meltdown has pushes the world economy into its worst crisis in decades. Consequently, million people unemployed, lost houses and other belongings. Thousand companies including small, medium, and big had been shut down or reaching to bankrupt. The fall of the world largest auto company, General Motor[1] of U.S, and the bankruptcy of Lehman Brothers[2] are the largest bankruptcy filling in U.S history. According to U.S. Labor Department indicated that in March 2009, there is 663,000 jobs vanished in the past month. The Labor Departments statistics show that job losses occurred in all sectors of the U.S economy: white and blue collar, manufacturing and service sectors, private, and public arenas. Not only in U.S, but also Britain, Germany, Japan, China, and almost all the countries around the world, especially, Cambodia, the newest developing country during 20th century, are sinking into recession.

Cambodia located in Southeast Asia, next to Thailand, Vietnam, and Laos PDR. It has over 14 millions people, but it has around 32% of population (4.3 million people) living below poverty line[3] whom considered to earn income less than one dollar per day.

Since Cambodia has entered into the Association of Southeast Asian Nations (ASEAN) in 1999 and the World Trade Organization (WTO) in 2004, Cambodia is likely involved more and more in regional integration and globalization. The textiles and clothing industry, tourism, construction, and agriculture are the main sectors that largely involve in international markets and they also have largely driven the economic growth as well. Therefore, it is reason why the recent global economic crisis could impact to Cambodia economy as a result Cambodia is forced to fall in hardship again since its peace day from genocide regime and civil wars in the late 1970s while Cambodia since then has been growing GDP around 11% over the previous three years before global financial crisis[4]. As giving the country’s dependence on export markets and foreign direct investment for economic growth, it is obviously true that the impact of global economic crisis on textiles and clothing industry, tourism, and construction sectors[5] could bring severe implications on economy and poverty of Cambodia.

2. BODY

2.1. The Impacts On Textile And Clothing Industry (T&C)

T&C is the most important sector, but it is also the most vulnerable sector to global economic crisis.

“Because Cut Make and Trim factories[6] in Cambodia are also mostly subsidiaries, the unfavorable effect of the crisis on their parent companies based abroad has direct implications for them in terms of garment order allocations” (Kang et al., 2009).

Only 7% of T&C owned by Cambodia, the rest 97% are owned by foreign countries including Taiwan 25%, Hong Kong 20%, China 15%, Korea 12%, Malaysia 6%, Singapore 4%, U.S 4%, and others 7%[7]. As global economic crisis risen first in foreign countries, the location of parent companies, that’s why during 2008 to the beginning 2009, T&C sector in Cambodia faced a big downturn in the term of international export and lead to shutting down factory, operations suspension, working hour reduction, and cutting laborers, as a result this brings a great difficulty to Cambodian worker employment situation whom most of them originated from under poverty line population whom migrate from rural to urban in order to earn money for supporting their family in provinces.

“Global economic crisis brings T&C a decline in exporting as it rolls down to 65% of total export in 2008 that causes 60 factories in Cambodia closed down and a number have been suspended operations. Worst of all, there are 51,000 garment worker were laid off between 2008 and February 2009” (Prasidh 2009).

To be noted, T&C sector contributed 17% to Cambodia’s GDP growth in 2007 through exporting to U.S market around 70-80% of total export[8]. However, it decreases by an estimated 4% in 2008 as the export rolls down to around 65%. The decline number seems to be small, but it means so much in case Cambodia loses million of dollars income in which this consequence has wiped out approximately 27,000 jobs[9]. And worst of all, the sector is expected to fall further in 2009 by 3% and could mean an addition loss of 19,000 jobs more.

T&C is strongly relative to poverty reduction because poverty reduction is heavily depended on T&C sectors as it offers jobs to thousand of rural-urban migrants of Cambodia. Its decline not only brings negative effect to unemployment, but also a big issue on their families that these workers individually support through remittances. In other word, the loss of jobs means the loss or less income to cover the expenditures. Therefore, this situation forces poor people to cut down their daily expenses and other unnecessary expenses such as education, health, medicine cost etc. And some have to reduce the quantity and quality of food and as they prefer to eat less nutritious and less full stomach. In short, decline in T&C sectors is decline in Cambodia economy’s growth and rising in poverty that negatively affect to social welfare of people in rural community.

2.2. The Impacts on Construction Sector

Another sector that is also badly affected by global financial crisis is construction sector, which is also considered the main factor and the most fragile in term of economic growth of Cambodia. This sector contributes to GDP for around 6.7% in 2007[10]. However, it is not different from T&C sectors, global economic crisis pushes foreign and Cambodian investors to fallback or suspend construction activities and cancel many mega projects causing the investment in construction dropped dramatically in quarter of 2008 and result in 15,000 jobs lost[11]. New investment in construction down 12.5% during the first 11 months of 2008 compared to same period a year ago; falling to US$2.8 billion during this period, down from US$3.2 billion in 2007, according to the Ministry of Land Management, Urban Planning and Construction. More than 30% of construction jobs have evaporated as projects are cancelled or scaled back. In first 11 months of 2008, ministry registered 1,869 projects country-wide, down from 1,942 in 2007. The drop is sharpest in projects funded by FDI, with more declines expected next year. Many projects could go bankrupt[12]

The situation construction sector in Cambodia mostly all depended by foreign investors that means it is depended on foreign-financed, thus the sector is very dependent to foreign countries. If the parent company is down, so is the child company.

“With the global tightening in liquidity and gloomier prospects in the domestic economy, foreign investors scrambled to defer or cancel their investments in the country, including mainly in construction. Some mega projects have been cancelled or scaled back, notable among which were Korean-financed projects, in light of the depreciation of the Korean won and the liquidity crunch in parent companies” (Cambodia Economic Watch, 2009; Nguon and Soeun, 2009; Sothea, 2008; Sturrock, 2009; World Bank, 2008c).

In Cambodia, there is roughly 75% of capital investment on construction sector is Foreign Director Investment (FDI) comprising 62.4% from China and 35.1% from South Korea[13], Hence, there is less chance that Cambodia can escape from the impact of economic crisis on this sector.

As a result, there is about 40% of the approved construction projects had been implemented in 2008[14] and there is approximately more than 30% of construction jobs have been lost as projects are canceled or scaled back due to financial difficulties[15]. According to Focus Group Discussion[16] (FGD), there is approximately about 40% of construction workers have returned home, and another 40% may lose their jobs in sooner or later. Based on the multiplier model, an estimated 36,500 construction jobs were cut in 2008 and another 25,600 jobs will be cut as well in 2009. With demand for property down until possibly 2010, it may be awhile before employment rebounds in the sector. According to FGD, the labor force in the construction consists predominately of male workers between the ages of 16-40 years old. Most are unskilled workers, while those with skills are between the ages of 28-35 years old. They are almost always migrants from rural areas such as Svay Rieng, Prey Veng, Takeo, Kampong Speu, Kampong Chhnang, and Kampong Cham. Workers interviewed by FDG asserted that they would go back home immediately when they lose their jobs and cannot find jobs in this sector.

In overview on construction sector, it is obvious that the impact of economic crisis on this sector will slow down economic growth of the country. In addition, many social problems will also arise as well as in term of unemployment of poor people.

2.3. The Impacts on Tourism Sector

Besides textile and clothes industry and construction, tourism is also one of the important sectors that contribute to growth of Cambodia’s economy. The GDP contribution of tourism is mainly incorporated in the hotels and restaurants category of the national accounts and according to government statistics, hotels and restaurants accounted for an estimated 4% of GDP in 2007[17]. Tourism plays an important role in the development and it provides opportunity of employment, household income, improvements in infrastructure, and training and general education for many people. During economic crisis 2008 and 2009, the number of tourist arrival to Cambodia has decreased dramatically, for instance as cited in Cambodia Economic Watcher 2009 by National Institute of Statistics (NIS) and Economics Institute of Cambodia (EIC) shown that the number of tourist arrival through Phnom Penh International Airport jumps down quickly from 21% in May to 3% in September 2008. Also, the situation at Siem Reap International Airport is even worse, with the same statistic reaching -10% in September 2008. Consequently, flight movements at both airports are considerably lower in 2008, and expectedly also in 2009 comparing with previous years. Evidence from domestic flights, the number of flight decreased by 22% in Siem Reap for the period January-May 2008 over the same period in 2007, and by 10% in Phnom Penh for the period January-September 2008 over the same period in the preceding year.

There are so many things that rely on tourism sectors and mostly is self-employed activities such as airlines, hotels, guesthouses, travel agencies, tour operator, big and small restaurants, souvenir shops, food vendors, tuk-tuk and taxi drivers, etc. The decrease in number of tourist brings many of these activities fall into instable economy that means all services and products that depend on foreign consumers are likely to get more vulnerable to the global economic crisis. One of the hotel managers in Siem Reap claimed that he had very few customers since the beginning of 2008 until now. Several of restaurant managers also claimed that now their incomes were declining due to less and less customers. Officials of travel agencies said that many of their trained tour guides were free having no clients to hire them. Most of them had complained about fewer customer and they planed to cut some of their staff if the situation remained unsolved or the same and worse. Similarly, other hotels, guesthouses, travel agencies, tour operators, restaurants, massage and sport clubs, and casinos also have planned to cut of their staff as well if the trend still continues. According to Ministry of Tourism (MoT) registry as of December 2007 showed that there are 48,050 workers has been employed for 395 hotels and 891 guesthouses. And there are 3,350 trained tour guides has been working for 451 travel agencies and tour operators nationwide. Based on MoT, there are currently 920 restaurants, 190 massage parlors, 50 sporting clubs, 32 sourvenir shops, and 22 casinos across Cambodia in which there are 25,000 employments. At another corner, Tuk-Tuk drivers in Siem Reap, Phnom Penh, and Sihanouk Ville, are complaining that they can earn around $ 2.50 to $ 5 per day while in the past they could earn around $ 15 to $ 20 per day. There are approximately 14,000 Tuk-Tuk drivers in which 50% of them are migrants from nearby provinces such as Kampong Thom, Oddar Meanchey, Kampong Cham. Therefore, there is no doubt that those workers and even Tuk-Tuk driver are facing in vulnerability sooner or later due to the impact of global economic crisis.

3. CONCLUSION

In conclusion, the global economic crisis brings the big impacts as a whole to Cambodia’s economy. Consequently, Cambodia has a great downturn in term of investment, import and export that lead to decline in GDP growth, economic activity, and employment rate. Because of declining in textile and clothes industry, construction, and tourism, the real GDP would slow to 6% in 2008 and to 5.1% in 2009[18], from 11% in 2007 which means economic crisis will likely have a severe impact on Cambodia’s economy. All of these impacts will make Cambodia faced the increase of poverty in the future if the situation remained worse. According to the Human Development Index (HDI), which provide a measure of wellbeing, Cambodia is ranked at 136th out of the 179 countries with data in 2006 (UNDP 2008). Although, from 1994 to 2007, poverty reduction strategy has reduced the poverty rate around 15% (in 1994 it was 40%). It is obvious that economic recession must make a slow to poverty reduction strategy due to less employment rate that causes less and less in family income, especially, among the poor and vulnerable groups as they are likely to be heavily attacked by the impacts of this phenomenon. Accept it or not, they have no choice but to go back to their situation as before in which they have to reduce their daily consumptions, leave their children drop school in order to give support to family income, reduce their other expenditure including education, health care and medical cost, etc. in other words, poor and vulnerable people would lose their parts or all of their physiological needs including food, shelter, and clothes to be survive. Worse than this, some of female workers have chosen to work in entertainment sectors such as beer promotion girls, karaoke girls, or even sex workers when they lost jobs. According to the United Nations Inter-Agency Project on Human Trafficking (UNIAP) indicated that there is between 15-20% of former garment workers who have lost their jobs as a result of the global economic crisis have joined the capital’s entertainment sector, sparking concerns that many have embraced sex work as a last-ditch means of supporting their families[19]. Therefore, the government should take care and prepare immediate plan for the poor and vulnerable population as the first priority. Meanwhile the government should provide more focus on agriculture development such as providing low interest loan, improving rural infrastructure, building agricultural research and development facility, increasing irrigation system. Because agriculture is expected to grow significantly as it seems not to be much affected by the global financial crisis[20], agriculture is the only one strength the country has at the moment that could be maximized for local food security unlike other sectors, T&C, construction, and tourism, which are likely heavily depends on external factors rather than internal factors.


REFERENCES:


Hossein Jalilian, Chan Sophal, Glenda Reyes and Saing Chan Hang, with Phann Dalis and Pon Dorina (May 2009). Global Financial Crisis Discussion Series Paper 4: Cambodia. ODI/CDRI

Kang Chandararot, Sok Sina, Liv Dannet (March 2009). Rapid Assessment of the Impact of the Financial Crisis in Cambodia. ILO Sub-regional Office for East Asia

CNBC. Lehman Brothers Files For Bankruptcy, Scrambles to Sell Key Business. Retrieved on January 7, 2010 from http://www.cnbc.com/id/26708143

CNNMoney. GM bankruptcy: End of an era. Retrieved on January 7, 2010 from http://money.cnn.com/2009/06/01/news/companies/ gm_bankruptcy/index.htm

ILO. (2009). Global Jobs Crisis and Beyond. International Institute for Labour studies

Phnom Penh Post. Sex work lures unemployment. Retrieved on January 10, 2010 from http://www.phnompenhpost.com/index.php/200911 1629561/National-news/sex-work-lures-unemployed.html

Ministry of Planning, National Institute of Statistic. Cambodia demographic and health survey 2005 (CDHS 2005). Retrieved on January 7, 2010 from http://www.nis.gov.kh/index.php/component/content/article/29-cdhs2005/39-about-cdhs-2005

U.S. Unemployment Rate Soars. Jobless Level At Great Depression Levels. Retrieved on January 7, 2010 from http://www.globaleconomiccrisis.com /blog/ archives/273



[1] After years of losses, the troubled automaker is forced into bankruptcy. GM is set to close a dozen facilities and cut more than 20,000 jobs. (http://money.cnn.com/2009/06/01/news/ companies/gm_bankruptcy/index.htm)


[2] Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers is the largest bankruptcy filing in U.S. history with Lehman holding over $600 billion in assets. (http://www.cnbc.com/id/26708143)


[3] Ministry of Planning, National Institute of Statistics, 2005 data.


[4] Ministry of Economic and Finance.


[5] Agriculture sector is not included as based on Cambodia Economic Watch (2009) stated that the agriculture sector is expected to grow significantly in volume and is unlikely to be much affected by the global financial crisis.


[6] Cut Make and Trim factories referred to textile and clothing industry.


[7] Ministry of Commerce as cited in Kang et al. (2009)


[8] CDRI: Global Financial Crisis Discussion Series, Paper4: Cambodia


[9] This estimation is made by CIDS based on the drop in export revenue. GMAC estimates 25,000 workers have been retrenched so far due to the crisis. (see Kay, 2009, Jan. 9)


[10] CDRI: Global Financial Crisis Discussion Series, Paper4: Cambodia


[11] CIDS, Rapid assessment on the impact of the financial crisis in Cambodia, January 2009


[12] Chun, 2008, December 23


[13] Based on estimated data from Council Development of Cambodia up to November 2008


[14] ILO, Rapid assessment of the impact of the financial crisis in Cambodia, Kang et al. 2009


[15] Ministry of Land Management


[16] FGD is the main source for qualitative information on trends at the factory/business level and for understanding the possible (current) responses of retrenched workers and households


[17] CDRI: Global Financial Crisis Discussion Series, Paper4: Cambodia


[18] ILO, Rapid assessment of the impact of the financial crisis in Cambodia, March 2009


[19] The UNIAP has expressed concern that laid-off garment workers will be drawn into sex work to help support their families. (Phnom Penh Post, Jan 11, 2010)


[20] Cambodia Economic Watch 2009