Cambodia at the New Frontier—an Address to the Royal School of Administration

By Christine Lagarde
Managing Director, International Monetary Fund
Phnom Penh, December 3, 2013

As prepared for delivery

Good afternoon—tiveah sous-dey! It is such a joy and privilege to be here today. Let me thank and acknowledge His Excellency Pech Bunthin, Minister for Civil Service, as well as His Excellency Dr. Sum Map, the Director of this great school.

The Royal School of Administration is one of the premier academic institutions in Cambodia. Its job is to train the public servants of the future. It is a real center of excellence. You are here because you are the best and brightest talent in Cambodia. You are also here because of your unwavering dedication to public service, and to the noble virtue of helping and lifting up your fellow citizens.

As someone who was a public servant in France, and who is an international public servant today, I thank you and I salute you. You carry on your shoulders the hopes and dreams of Cambodia—a country where yesterday meets tomorrow, a country that blends enchanting beauty and visionary innovation.

Just this weekend, I had the great privilege of seeing the incredible temples at Angkor. There is nowhere in the world quite like this. The Khmer civilization was one of the greatest civilizations that humanity has ever known. You have a cultural heritage that is second to none.

Today, modern Cambodia represents Asia at its very best—looking outwards with optimism and embracing the world; building on the past in pursuit of an even better and more inclusive future; and always imbued with an abiding spirit of harmony and cohesion.

Cambodia today stands at the frontier. It is opening up a new economic chapter, a chapter filled with promise and possibility. As your performance propels you toward greater prosperity, you are on the way toward becoming a dynamic emerging market.

With this in mind, let me talk about two things today: (i) the economic environment in which Cambodia will be emerging; and (ii) how Cambodia can thrive in this environment and continue its upward momentum.

1. A new economic environment

Let me begin by talking about the environment you are entering—the global and regional economy being forged right under your feet.

The defining features of this new economy are the rise of Asia and the power of interconnections.

As many have noted, just as the 19th century belonged to Europe, and the 20th century was most associated with the United States, all signs point to the 21st century as the Asian century. This is your moment.

Look at how quickly the sands are shifting. Fifty years ago, the emerging markets and developing economies accounted for about a quarter of world GDP. Today, it is half, and rising rapidly—very likely to two-thirds of global GDP within the next decade.

This shift—unprecedented in scale and speed—is being driven by Asia. By some estimates, developing Asia alone will account for half of global GDP by 2050.

We are also seeing the dramatic rise of a global middle class, and with it, the rising aspirations of global citizens—for the opportunity to embark upon their own life journeys without encumbrance, for the chance to flourish in all of their endeavors.

By 2030, some studies claim that the global middle class will surpass 5 billion people, up from 2 billion today. Within a decade, the world could pass a magnificent milestone, with—for the first time ever—more middle class than poor people.

Once again, it is Asia in the vanguard, accounting for 85 percent of this rise. Again, this is your moment—for the people of Cambodia will certainly be vital members of that global middle class.

In so many ways, all roads are leading to Asia. Those roads are also turning into superhighways. As they do so, they are drawing the world much closer together.

The global economy is now more entwined than ever. Over the past three decades, the volume of world trade has increased fivefold. Once more, Asia is leading the way: over the past decade alone, trade within Asia tripled, and regional trade within emerging Asia grew even faster.

It is the same with financial flows. Since the IMF was founded in 1944, financial integration has increased by a factor of ten or more. By the time of the 2008 crisis, global capital flows were more than triple the level of 1995.

Nowhere are the interconnections more evident than in the world of communications. When I was young, people communicated by letter. International phone calls were prohibitively expensive. I remember living as a teenager in Washington, waiting five days for a letter to come all the way from my home in France.

It is a different world today. 3 billion people are now connected to each other on the internet. 3 million emails are sent each second. There are almost as many mobile devices as people on the planet.

In this new world, the connections never stop. There is no off switch. The world has become a hyperconnected hive of unified activity.

This world offers great promise—I would say greater promise than ever before in human history. The possibilities are endless, the opportunities limitless, the prospects vast.

This too is part of the Asian story. Asia has always thrived by embracing, not withdrawing from, the wider world. Its openness has been essential to its success—becoming the world’s most dynamic region, lifting hundreds of millions of people from poverty.

While integration makes us all better off, however, it does not come without risk. Deeper financial integration can make crises more likely and more harmful. We saw this play out during the global financial crisis.

For an interconnected world, even the smallest economic drumbeat can be amplified, echoing and reverberating across the world, often in an instant, often in unpredictable tones and pitches.

Another risk is that, in a high-speed global economy, too many people get left behind. In too many places, we see signs of rising inequality—which in turn can threaten sustained growth, economic stability, and social cohesion.

This is a live issue in Asia. Over the past quarter century, inequality has risen faster in Asia than in any other region. This is in stark contrast to the first wave of the Asian economic miracle—the three decades before 1990—when growth was broadly shared across the population.

The correct response to these risks is not to build barriers and hide behind walls. It is to walk out into the world—but with the right preparation and the right protection.

There is an old Khmer proverb that says the following: “Thousands of candles can be lit from a single candle, and the life of the candle will not be shortened”. In other words, our goal must to be link the world through illumination, and make sure these candles are not blown out.

2. How Cambodia can continue to thrive in this new environment

Let be now turn to my second point—how Cambodia fits into this picture.

So far, this country has navigated the world of interconnections extremely well. Its rise has been nothing short of remarkable—with growth averaging around 8 percent over the past decade, it has managed to double its per–capita income. The forward march continues, with growth expected around 7 percent this year and next.

In a true Asian spirit, Cambodia’s performance is driven by its openness to the world. Exports have nearly quadrupled over the past decade. While this has been dominated by garments, there are clear signs of diversification on the horizon. Foreign direct investment is shifting beyond garments, with FDI from Japan alone rising more than ten-fold since 2010. Tourism is also growing and diversifying, as more people are finding more places to love in your beautiful country.

This performance has been supported by sound macroeconomic policies and management. Policymakers have managed the public purse very well, and are striving to build a well-supervised and sound financial system.

Cambodia is also fairly well insulated from any financial turbulence in the wider global economy, given its fairly limited direct linkages into international capital markets, and the fact that most capital that flows into Cambodia is in the form of FDI. Still, headwinds from global capital markets—such as from the end of easy money in the United States—can affect the regional economies and spill over to Cambodia.

The key now is for Cambodia to continue its forward march and upward momentum, making the most of its position in the heart of Asia, the hub of the interconnected world.

Going forward, I think there are three priorities for public policy—laying the foundation for future success, ensuring that all participate in the prosperity of Cambodia, and ensuring that Cambodia participates in the prosperity of the region.

Let me talk about each in turn.

Laying the foundation for future success

Laying the foundation for future success must begin with education. As you all know so well, education is the stepping stone to a better world. Through education, we take a candle and we enlighten the entire country, the entire region, the entire world.

This is especially important in Cambodia, which is such a youthful country—with a third of the population under the age of 14.

Cambodia is at the cusp of a great change—moving from agriculture to industry, from farm to city. It is the young people who must manage this change, and they must be given the opportunity to acquire the skills and knowledge they need. They need education and they need jobs.

These needs are great. Youth unemployment remains high, and a quarter of a million people enter the labor market every single year.

While there has been good progress, Cambodia is still being held back by low levels of education and by inadequate skills. Spending on education is still only 2½ percent of GDP.

Each and every young person in Cambodia deserves the chance to achieve their true potential—and in turn, the potential of the economy. The next Steve Jobs, or Marie Curie, might be somewhere in Cambodia.

Investing in the future does not end with education, however. Cambodia needs investment in infrastructure—especially in power facilities, roads, and bridges. It needs greater economic diversification, including through rural development. It needs stronger institutions and governance. It needs a better business climate, based on impartiality and predictability.

Ensuring that all participate in the prosperity of Cambodia

Let me now turn to the second priority—ensuring that all citizens participate in the prosperity of Cambodia. To follow in the footsteps of Asian success, growth needs to become more inclusive—lifting everybody together and providing opportunities for all.

Cambodia has made great progress here, with the incidence of poverty falling from over 50 percent in 2004 to 20 percent in 2011. Yet too many people are still living in extreme poverty, earning less than $1.25 a day.

We know that poverty and inequality are bad for sustained growth—the kind of growth that Cambodia needs to become a vibrant emerging market. It makes it harder for people to get finance, makes countries more vulnerable to economic shocks, and reduces the trust that is the lifeblood of economic progress.

Again, there is a great Khmer proverb that speaks to this: “The rich depends on and thus should respect the poor; as the skirts surrounding the body; the brain needs the brawn; as the big ship depends on small boats.”

How can we support those small boats and make growth more inclusive? More spending on the social sector, especially on health and education, is a key first step.

Beyond that, a higher labor share of income would help create that vibrant middle class we are all waiting for—by expanding rural employment programs, shrinking the informal sector, and making sure that all workers have sufficient wages to live with dignity and security. Greater access to financial services is also a crucial stepping stone to success.

When I talk about including all in rising prosperity, I am talking about women too—half of the population! As was demonstrated in a recent IMF study, letting women participate in labor markets to the same degree as men can raise per capita income substantially—including by 23 percent in South Asia, and by 15 percent in East Asia and the Pacific.

I am pleased to note that Cambodia is ahead of the curve here—80 percent of its women participate in the labor force, against a global average of only 50 percent. Even so, women earn only three quarters as much as men for similar work, and three quarters of women are stuck in low-wage informal jobs. They face glass ceilings and income ceilings.

I know that Cambodia is home to some of the most dynamic and dedicated women in the world. They represent the best of Cambodia and the future of Cambodia. By doing more to lift their dignity and let them flourish, Cambodia will be assured of success in the years ahead.

Ensuring that Cambodia participates in the prosperity of the region

Let me now turn to my third priority—ensuring that Cambodia participates in the prosperity of the region, a region that is rising rapidly in economic prominence. This calls for a sustained commitment to openness and economic cooperation—the values that have always served Asia so well.

As always, there is a great Khmer proverb for this: “a bunch of chopsticks is hard to be broken”. In other words, binding ourselves together makes us stronger—and better able to thrive in an interconnected world.

You know this here in Cambodia, especially through the ASEAN countries’ commitment to deeper cooperation. The ASEAN Economic Community, expected to come on line in 2015, is a major step forward, offering boundless opportunities for the Cambodian people. Most immediately, it offers Cambodia larger markets and larger FDI, which can lead to more jobs.

It can also lead to greater financial integration. In turn, this can boost domestic demand, partly by making it easier for small businesses right here in Cambodia to get credit. It can make economies safer, by allowing more insurance against adverse developments. It can reduce inequality, by letting more poor people have access to financial services.

Of course, integration comes with costs too, as countries like Cambodia could be overwhelmed with surges in capital inflows in a way that threatens financial stability. Indeed, we are already seeing some warnings signs here, with rapid credit expansion. This needs to be managed carefully through monetary and financial policies.

While we talk about economic cooperation, I must mention the IMF. For the IMF is the forum for economic cooperation in the world today. Cooperation is why we were founded; it is in our lifeblood.

I am proud of the great partnership between the IMF and Cambodia over the years. We stood together as you built the foundations and institutions of your economy.

I promise you this: we will continue to stand together with you—to serve you—as you step across the frontier to lasting success. We are your friends.

Conclusion

Let me conclude. You are the future policymakers of Cambodia. The path I have talked about is your path.

I have already quoted a number of Khmer proverbs, so if you will indulge me, I will now quote a Frenchman! It was Pierre Teilhard de Chardin who said the following: “Our duty, as men and women, is to proceed as if limits to our ability did not exist. We are collaborators in creation”.

This is the thought I want to leave you with. You are called upon to create a dynamic economy of tomorrow, to push Cambodia toward the frontier and beyond. You are called upon to guide Cambodia as it reaches its true destiny—its “veasna”, as you say in Khmer.

I have full confidence and optimism in you and your abilities.

Thank you—aw-kohn!



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