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Planet
id: planet.earth
diameter: 12742 km
pop: 7.1 B
area: 510.1 M km2
tempL: -89 C
tempH: 57 C
Continent
id: continent.asia
countries: 48
pop: 4.2 B
area: 44.579 M km2
density: 87/km2
Sub
id: sub.asia.se.indochina
countries: 3
Country
id: country.cambodia
prime: Hun, Sen
GDP: 17.8 B USD / PC: 1.1 K
capital: Phnom Penh
pop:15.2M d:84
area: 181 K km2
iso: KH KHM 116
prefix: +855
internet: .kh

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Cambodias Garment Sector Hits a Snag

Analysis

Cambodias economy depends on its garment industry, but workers persistent demands for ever-higher wages could cost the country its competitiveness in the years to come. (OMAR HAVANA/Getty Images)


Summary

As Southeast Asia continues to enhance its role as a global manufacturing hub, Cambodia may find itself lagging behind. Like other emerging destinations in Asia for low-end manufacturing, Cambodia faces a number of challenges such as regulatory obstacles, insufficient infrastructure, an uneducated workforce and lukewarm global demand in its quest to cultivate its industry and move up the manufacturing value chain. The countrys political atmosphere, largely undiversified economy and weak supply chain only compound its troubles.

On Aug. 24, the countrys Garment Manufacturers Association revealed that orders for Cambodian footwear and clothing had fallen 30 percent this year and that political uncertainty had forced more than 70 factories to close or relocate. Until official export statistics are released, the statement will be hard to verify, but it has already sparked contentious debate in the country. Opposition parties claim that the government-affiliated business organization is propagating specious data to counter efforts by labor groups to further raise the minimum wage. Regardless, the announcement highlights how the political tension plaguing Cambodias garment industry may also impede the countrys wider efforts at economic development.

Analysis

From post-World War II Japan to late-20th century China, low-end manufacturing has driven early industrialization efforts in many developing nations. In the early 1990s, Cambodia emerged on the global scene as a major garment manufacturer and exporter, aided by a young, inexpensive workforce, favorable investment policies, and preferential access to Western markets. The surge in Cambodias garment industry, combined with two decades of relative political stability and economic liberalization, helped the country rebound from decades of war and build one of the regions fastest-growing economies. But Cambodia has not moved past its reliance on the garment industry, which supplied 70-80 percent of its export revenue over the past decade and employed a large portion of its workforce. And over time, the sector has fallen victim to the countrys many political and structural challenges.
A Highly Political Industry

Given the countrys heavy dependence on a single industry, it is perhaps unsurprising that labor issues are a hot-button topic in Cambodian politics. The countrys high level of unionization and the simmering enmity between its ruling and opposition parties adds fuel to the debate. After elections in 2013 revealed the unprecedented strength of the opposition, labor took center stage in Cambodian politics. Disputes over wages, working conditions and the role of unions became highly politicized, and parties on each side of the political divide tried to turn the issues to their advantage. The opposition party and its affiliated trade unions took the matter far beyond securing rights and improving pay for workers, staging massive strikes across the country. As elections in 2017 and 2018 approach and Cambodias political scene remains largely unsettled, opposition parties will likely keep leveraging labor.

Labor is more than just a talking point for the opposition, which has managed to secure significant policy changes with the wave of unrest it unleashed. Over the past three years, repeated wage hikes have more than doubled pay for garment manufacturing jobs in Cambodia to $140 a month, putting the country on par with or above many of its regional competitors, including Vietnam, Bangladesh and Indonesia. Now, opposition parties and unions are demanding that the rate increase to $177 per month. As other countries in the region, such as Myanmar and Vietnam, pursue international trade more aggressively, Cambodias climbing manufacturing wages will continue to erode its competitive edge in the years to come.

A Tall Order

The problem for Cambodia is that wages in its garment industry rose too high, too quickly, at a time when the country is ill prepared to move up the manufacturing value chain or to diversify its economy. Of the major garment exporters worldwide, Cambodia is among the most dependent on textile and clothing for export revenue, employment and investment, second only to Bangladesh. Though both countries suffer similar deficiencies in infrastructure and labor productivity, Cambodias industrial capacity is still well below that of Bangladesh and largely operates at the downstream end of the industrial chain. Cambodias garment industry, moreover, is heavily concentrated around the capital city of Phnom Penh. And unlike Bangladesh, where local entrepreneurs control much of the industrial chain, Cambodias garment factories are mostly owned by foreign brands, making the industry highly vulnerable to external shifts.

Many East Asian economies for instance, those of Japan, Hong Kong, South Korea, and, more recently, China and Vietnam have managed to transition up the value chain. But the task is easier said than done. Even for Chinas economy, the process has been mostly reactive, peppered with inconsistencies and setbacks, and could take another decade to complete. Cambodia has even more hurdles to overcome to transform its economy, including severe infrastructural deficiencies outside its main manufacturing centers, an unskilled labor pool, and high electricity and energy costs. Nonetheless, if Phnom Penh addresses these challenges, Cambodias small economy, young labor force and relatively amiable relations with major regional economies such as China and Japan could work in its favor.

Over the past two years, investment from China and Japan has enabled Cambodia to broaden its economic activities to construction, service and light manufacturing (auto parts and electronics), despite an overall slowdown in investment. Though these diversification efforts have relieved some of the most pressing concerns over Cambodias economy, political uncertainty and structural shortcomings will continue to test the countrys competitiveness.

On Aug. 24, the countrys Garment Manufacturers Association revealed that orders for Cambodian footwear and clothing had fallen 30 percent this year and that political uncertainty had forced more than 70 factories to close or relocate.

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