Policy Note 83077 September 2013 TRADE DEVELOPMENT Helping Cambodia to become a sophisticated services exporter Significance Cambodia has experienced extraordinary economic growth in recent years, and become one of Asia’s most open economies. This impressive growth has been largely driven by a boom in the services trade, with services exports growing at over 20 percent annually for most of the past decade, led by a rapid expansion in tourism and transport services. Despite this, the size of the services sector in Cambodia’s economy remains relatively small. Cambodia has high services exports, but low domestic services relative to GDP, because its main services industry, tourism, is export-oriented. There is, therefore, still considerable scope to develop the services sector, both domestically and internationally. However, in order to maintain growth momentum in the services sector, Cambodia now needs to move beyond the pillars of tourism and transport, and diversify into exports of more sophisticated, high-value-added modern services. But in order to make this transition successfully, Cambodia needs to address several major challenges, particularly in the area of information technology. In addition, Cambodia needs to act with a sense of urgency, as potential competition from other developing economies in the vibrant Southeast Asia economic region could erode Cambodia’s advantage. Background Electronic infrastructure Cambodia’s decisive policies on economic openness and The expansion of services in Cambodia will require better regulatory reform are conducive to sustaining foreign infrastructure, particularly in broadband telecommunications. investment, diversifying services exports, and developing Cambodia has the lowest broadband connectivity in the high-value-added services exports. This will help to support region apart from Myanmar. This issue needs to be addressed, and maintain Cambodia’s impressive economic growth rate given that there is empirical evidence that suggests that over the past two decades, which has largely been driven broadband connectivity is a major contributor to economic by services exports in the form of tourism and transport. growth. Cambodia’s institutional and regulatory framework Services exports have been growing at more than 20 in the telecom sector is not conducive to attracting foreign percent annually for the past decade. However, this growth investors. Consequently, telecommunications services have rate comes from a very low base and is not sustainable. grown at a meager 3 percent annually over the past Therefore, if it is to take full advantage of the services seven years, compared with 18 percent annual growth for sector, as both an input to other economic activities, and tourism. More worryingly, Cambodia’s ICT infrastructure and a potential source of trade diversification, Cambodia needs connectivity are lagging behind those of other competing to expand its services export market beyond the traditional countries in Southeast Asia. Cambodia’s regulatory framework area of tourism. According to a recent World Bank report in telecommunications has been described as inconsistent titled Cambodia Trade in Services: Performance and and difficult to understand. A new regulatory body has Regulatory Framework Assessment, improvements in three been established as the supervisory authority in the sector, sectors could lead to higher levels of foreign investment but influences from other government agencies may have and lead to enhanced economic growth. an impact on its deliberations. A country-wide broadband strategy, combined with reduced regulatory and de facto limitations to foreign investment in the sector, may attract Policy Note Trade Development more investors. The adoption of a telecom law, in line with  rovide for public disclosure of legal and regulatory • p internationally accepted principles of telecom regulation, and drafts; in line with Cambodia’s WTO obligations, would provide legal ndicate the timeframes for the private sector to provide • i clarity for telecom providers. The activities of the regulator comments and for agencies to process such feedback; should be transparent, and its technical ability enhanced.  ndicate timeframes for receiving feedback from • i stakeholders; • s  et out procedures for referring a matter to an overseeing Human skills authority; dentify the agency in charge of conducting regulatory • i Cambodia’s large young population provides enormous assessments; and potential, but needs to be better educated and trained if it dentify the oversight body in charge of ensuring the • i is to contribute to the expansion of the services sector. observance of regulatory policy, as well as the internal Realizing this potential will require improving general agencies within each ministry to administer the regulatory education levels and addressing serious skills mismatches. procedures. A recent World Bank report, Matching Aspirations: Skills for Implementing Cambodia’s Growth Strategy, provides Adequate regulatory bodies are essential components in recommendations that include expanding finance for the implementation of WTO and ASEAN commitments. early childhood development, strengthening institutional development, and promoting incentives for good results among skills providers, including in higher educational institutions. Conclusion Given the right environment, exports of modern services, including IT-related services, could play an increasingly Regulatory framework important role as a source of employment, revenue and investment. Ensuring that they do so will require strong A more transparent and predictable regulatory framework initiatives to foster the human resources and build the may allow Cambodia to capture the potential for services infrastructure needed to support higher-value-added exports. One way of achieving this would be to adopt clear services, in addition to improving governance and technical policy guidelines that set out principles and procedures capacity in the regulatory framework. to be followed in making laws and regulations. These guidelines could, at a minimum: The World Bank Office For further information, Funding for the Trade Related please contact: Assistance Cambodia Multi-Donor No. 113 Norodom Blvd. Phnom Penh - Cambodia Trust Fund from the EU, DANIDA and Tel: (855 23) 861 300 Julian Clarke UNIDO is gratefully acknowledged Fax: (855 23) 861 301/302 Senior Trade Specialist Visit our website: (jclarke1@worldbank.org) http://www.worldbank.org/cambodia Vannara Sok This note reflects the views of the authors and not Operations Officer necessarily those of the World Bank and the donors. (vsok@worldbank.org)