MAIN REPORT CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW MAIN REPORT CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW Wendy Cunningham and Claire H. Hollweg with Johanne Buba, Marong Chea, Dilaka Lathapipat, Une Lee, Anne Lopez, Sodeth Ly, Lan Nguyen, Miguel Sanchez, and Maheshwor Shrestha Contents Currency Equivalents 4 Abbreviations and Acronyms 4 Preface 5 Acknowledgements 6 List of boxes, figures and tables 7 Executive Summary 9 Introduction 11 Snapshot of Today’s Jobs: Cambodia’s Export-Oriented Development Strategy Has Uniquely Shaped its Jobs Structure 12 Cambodia’s economy supports many jobs 12 Although modern jobs are rapidly being created, the majority of jobs are still in traditional sectors 12 By many measures, job quality is improving but remains low 15 The current economic structure has served some populations better than others 19 The Current Export Strategy May Not Deliver the Future Jobs to Which Cambodia Aspires 20 Weak employment growth in FDI and domestic firms challenges better jobs 20 Labor productivity lags behind other countries and unit labor costs are high 22 Exports are concentrated in low-value activities 24 Low skill levels and returns to education underpin low labor productivity 25 Links with the domestic sector are weak 29 Macroeconomic risks also create jobs risks 30 Policy for a Jobs Future Consistent with Cambodia’s Vision 2050 31 1. Diversify Exports and FDI into Higher Value-added Value Chains (or Segments of Value Chains) 32 2. Streamline Procedures and Reduce the Costs of Establishing and Expanding SMEs 33 3. Support Household Enterprises to Enhance Their Productivity 34 4. Support the Development of Links between FDI Firms and Domestic Input-supplying Firms 35 5. Build a Skills Development System that will Attract Higher-value FDI and Increase Productivity across the Economy 36 6. Promote Efficient Labor Mobility and Job Matching 37 7. Regain Macroeconomic Independence and Exchange Rate Flexibility 38 A Vision of Cambodia’s Future Jobs 40 References 41 Currency Equivalents Exchange Rate Effective October 15, 2018 Currency Unit = Cambodian Riels (KHR) USD 1 = KHR 4,076.47 Abbreviations and Acronyms CMT Cut-Make-Trim CSES Cambodia Socio-Economic Survey EAP East Asia and Pacific EGRA Early Grade Reading Assessment EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product GVC Global Value Chain ILO International Labor Organization ICT Information and Communications Technology IT Information Technology MNC Multi-national Corporation OECD Organization for Economic Cooperation and Development PPP R&D Research and Development SEZ Special Economic Zone SME Small and Medium Enterprise TVET Technical and Vocational Education and Training VAT Value Added Tax STEM Science, Technology, Engineering and Math Regional Vice President Victoria Kwakwa Practice Senior Director Michal Rutkowski Practice Manager Philip O’Keefe Task Team Leaders Wendy Cunningham and Claire Hollweg CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 4 MAIN REPORT Preface Cambodia's Future Jobs: Linking to the Economy of Tomorrow summarizes an extensive analytical exercise that is described in full in the accompanying Technical Report. All of the material in this Main Report document, unless otherwise cited, is presented in detail in the Technical Report, including data sources, full citations, and a complete analysis and interpretation. The Technical Report includes the following chapters: Chapter 1: Introduction to Jobs in Cambodia Chapter 2: Macroeconomic Policies Conducive For Creating Good Jobs Chapter 3: Creating More and Better Jobs Through Private Sector Development Chapter 4: Jobs and the Export Sector Chapter 5: Workforce Skills for More, Better and More Inclusive Jobs Chapter 6: Policy for Future Jobs Consistent with Cambodia’s Vision 2050 Several background papers were also prepared to inform the report. They are cited in the chapters where their results are presented. This report was prepared with financial support from the Government of the Republic of Korea through the Korea-World Bank Trust Fund. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 5 MAIN REPORT Acknowledgements The report was written by a World Bank team lead by Dr. Wendy Cunningham and Dr. Claire Hollweg. The team included Sodeth Ly, Marong Chea, Miguel Sanchez, Maheshwor Shrestha, Johanne Buba, Une Lee, Lan Nguyen, and Anne Ong Lopez. Excellent research assistance was provided by Audrey Stienon and Anam Rizvi and administrative support provided by Da Lin, Socheat Ath, and Corinne Bernaldez. The report was prepared under the guidance of Victoria Kwakwa, Vice President for East Asia and the Pacific; Ellen Goldstein, Country Director for Cambodia, Myanmar, and Lao PDR; Inguna Dobraja, Country Manger for Cambodia; and Philip O’Keefe and Jehan Arulpragasm, Social Protection Sector Managers at the World Bank. The report benefitted from detailed peer review guidance provided by Obert Pimhidzai, Margo Hoftijzer, Julian Clarke, Tom Farole, and many colleagues in the World Bank who provided insights, suggestions, and improvements to the report process and the final document. The team wishes to thank H.E. Vongsey Vissoth (Permanent Secretary of State, MEF), H.E. Hem Vanndy (Under Secretary of State, MEF), Mr. Chea Kok Hong (Director of Macroeconomic and Fiscal Policy Department, MEF), H.E. Laov Him (Director General of TVET, MLVT), H.E. Hong Cheoun (Director General, NEA), and H.E Sisowath Doung Chanto (President of National Productivity of Cambodia) for their constant guidance and support throughout the process. The team is also grateful to participants in numerous consultations meetings with the Ministries of Economy and Finance; Labor and Vocational Training; Commerce; Education, Youth and Sport; and Tourism, as well as with representatives from the private sector, NGO community, and the development partners. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 6 MAIN REPORT List of boxes, figures and tables BOXES Box 1: Jobs Definitions 11 Box 2: The Impact of Minimum Wage in the Garment Sector 17 Box 3: The Stages of Global Integration for Development and Jobs 20 Box 4: Cambodia’s Investment Climate Assessment 23 Box 5: The Rise of the Sewbots? Maybe Not Quite Yet… 31 Box 6: Policies to Move Up the Value Chain in Cambodia’s Tourism Sector 33 Box 7: Policy Implications for Inclusive Jobs 39 FIGURES Figure 1: Labor Force Participation Rates in Cambodia and Comparator Countries 13 Figure 2: Job Type Distribution, 2015 14 Figure 3: Job Types, 2007 and 2015 14 Figure 4: Composition of Household Employment, 2014 15 Figure 5: Composition of Household Income, 2014 15 Figure 6: Growth in Employment Share of Tasks, by Task Type, 2009-2015 16 Figure 7: Hourly Earnings of Household Enterprise Workers and Wage Workers 18 Figure 8: Gender Wage Gap 18 Figure 9: Source of Employment, by age 19 Figure 10: Employment Elasticity to Sales Growth for Apparel Firms 21 Figure 11: The Lifecycle of a Firm 21 Figure 12: Firm-level Productivity and Capital Intensity, 2016 22 Figure 13: Productivity in Agriculture and Industry 22 Figure 14: Average Wages and Unit Labor Costs in Apparel Firms 23 Figure 15: Median Value-Added of Exports 24 Figure 16: Total Labor Content Share of Apparel and Textiles in Gross Exports 24 Figure 17: Rate of Return to Education 25 Figure 18: Share of Employers Who Are Affected by An Inadequately Skilled Labor Force 26 Figure 19: TVET Enrollment 26 Figure 20: Percentage of Second Grade Students who Perform below Proficiency on Reading Assessments (EGRA) 26 Figure 21: Net Effect of High-Skilled Emigration on the Share of High-skilled Workers in ASEAN Source Countries 27 Figure 22: Inputs and Supplies Locally Sourced by Garment Firms 28 Figure 23: Correlation between Wage Employment and the Number of Non-farm Enterprises 28 Figure 24: Export Growth to the EU and EUR/USD Exchange Rate 29 Figure 25: Seven Policies for More, Better, and More Inclusive Jobs in Cambodia 32 TABLES Table 1: Employment by Main Occupation, 2004 and 2014 16 Table 2: Ten Fastest Growing Occupations, 2009 and 2014 16 CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 7 MAIN REPORT CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 8 MAIN REPORT Executive Summary Cambodia has succeeded in implementing an family farming or household enterprises, which are lagging effective FDI-led development strategy. Its 7 percent behind the rest of the economy in terms of productivity GDP growth rates have been accompanied by rapidly falling and growth. Fully 94 percent of jobs are in low-skilled poverty rates. Over 1 million workers are now employed occupations, with managers and professionals accounting for in the garment sector, and the share of jobs in industry less than 5 percent of all jobs. While wages have increased continues to grow. in recent years, particularly for those near the bottom of the income distribution, more than half of jobs operate outside Cambodia’s exposure to the global economy of the modern economy. Family farming and household combined with the government’s outward-looking enterprises primarily trade amongst themselves, which limits economic policies have yielded good results. First, by their growth and profits. The economy provides markedly opening its borders to international trade and investment, fewer opportunities for women and older workers than it does Cambodia attracted FDI, particularly in the garment sector, for men and younger workers. because of its low trade barriers, stable government, and relatively hassle-free business practices. Second, the spike The current model is further at risk due to several in international commodity prices was a boon to a still largely emerging mega-trends that will alter how external agricultural economy, thus alleviating pressure to make a forces shape Cambodia’s jobs picture in the future. quick transition out of agriculture. Third, a further reduction Changing consumption patterns resulting from a growing of trade costs and the existence of an abundance of highly consumer class within Cambodia and across Asia will change mobile, low-skilled, and, thus, low-cost, labor provided a the composition of both domestic and export demand. New further impetus to investments in the garment sector and a trade agreements and technologies will further shift global continuation of the structural transformation process. trade patterns. Automation has the potential to create more, better, and more inclusive jobs, but also to make others Although Cambodia’s current economic model is disappear. The advent of new technologies means that still delivering good new jobs, its success may be workers will require a more complex set of skills than in slowing down. The garment sector that has been the the past. main driver of Cambodia’s jobs and growth is showing some weaknesses. Job creation is slower than in the Cambodia can manage these trends by taking the same sector in other countries. Its labor productivity steps necessary to move into the next stage of FDI- has stagnated, and unit labor costs are higher than those led development: diversification and densification. in competitor countries, thereby negatively affecting This would mean pursuing higher-value FDI and fostering Cambodia’s competitiveness. The potential loss of trade links between exporting firms and domestic input-supplying preference with the EU and the US in the near term firms. However, this will only be possible if Cambodia lays will also impede the country’s competitiveness in key the foundations by reforming its own policies to attract and export markets. The garment sector has few links with retain more, better, and more inclusive jobs. domestically owned small and medium-sized enterprises (SMEs) as it relies less on local sourcing than do garment We propose seven jobs-specific policies that, in firms in other countries—such as Vietnam, Turkey or conjunction with broader sectoral development India—or other export-oriented industries in Cambodia. strategies, have the potential to generate better The labor force does not have the skills to attract jobs in Cambodia in the future. These policies are in higher-value FDI, nor do they have the means to acquire alignment with the principles and recommendations of the those skills. Royal Government of Cambodia’s Rectangular Strategy- Phase IV. We present these seven policy actions in one Moreover, a large share of Cambodia’s current jobs document to show how they can improve the quality and may not be of the kind that the country will aspire to increase the inclusiveness of Cambodia’s jobs. The specific create in the future. More than half of all jobs are still in policy recommendations are as follows: CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 9 MAIN REPORT First, diversify exports and FDI into higher value-added Fifth, build a skills development system that will value chains or segments of value chains. Most current attract higher-value FDI and increase productivity jobs are in low-value segments of global value chains (GVCs) across the economy. While a solid education system is in which Cambodia’s exports sectors have the lowest median the foundation of any future workforce, today’s workforce value-added among those of their peer countries. Simplifying in Cambodia is getting by with only 6.3 years of education processes, providing incentives to foreign investors, and on average, while having few opportunities to upgrade their creating quality assurance facilities will encourage the skills. This points to the need for a dual strategy. First, it diversification of exports and FDI into higher value-added value would be advisable to reform today’s education system to chains (or segments of value chains). Signing, finalizing, and help the next generation of workers to acquire the broad enforcing international trade and investment agreements with range of skills needed to work in a knowledge-intensive key trade partners will also be vital to mitigating the risk of economy. Second, policymakers should consider developing losing special access to markets such as the European Union. a strategy (including incentives) for engaging enterprises in the design, financing, and support of a modernized technical Second, streamline procedures and reduce the costs and vocational education and training system (TVET). of establishing and expanding SMEs, which have considerable potential to create jobs. It is harder for firms Sixth, promote ef cient labor mobility and job to expand in Cambodia than in other countries. Young firms matching. A mis-match between skills and jobs stifles in Cambodia —defined as those that have been operating for productivity and frustrates workers’ sense of well-being. less than five years—create little employment, even though Helping people to find and acquire the right jobs will reduce this stage is critical for a firm’s growth. Establishing a range of these inefficiencies. First, policymakers should systematically institutions that can support entrepreneurs during the various produce and disseminate information about jobs inside and stages of a firm’s development, including ideation, incubation, outside of Cambodia to help students, jobseekers, education and acceleration, will help SMEs to grow and create jobs at and training institutes, and employers to make skills the various stages of their lifecycles. There is also a need to development choices that are aligned with rapidly evolving reduce the costs that they incur in doing business as well as market demand. Second, they should continue opening to enhance their access to finance to be able to compete on formal international migration channels while supporting both the domestic and international markets. programs that encourage circular migration. Third, help household enterprises enhance their Seventh, regain macroeconomic independence productivity and create better jobs. Nearly one in five and exchange rate exibility. US dollar fluctuations jobs in Cambodia are in household enterprises, and this significantly impact Cambodia’s trade and commodities share is projected to grow as a consequence of more rapid sectors, which are responsible for most of the country’s urbanization. Thus, it will be necessary for policymakers to jobs. As Cambodia begins to export to a broader range have a much stronger focus on this often-forgotten segment of countries, macroeconomic and fiscal stability will help of the economy to enable these very small enterprises to shield existing jobs from factors related to the US dollar. increase their revenues and, hence, to create better jobs. Information technology can help household enterprises If Cambodia can successfully transition to the next to improve their basic business practices and to access stage of an FDI-driven development strategy, this is broader markets. likely to produce more and better jobs. Achieving this goal will be a complex challenge and will require strong Fourth, support the development of links between leadership by a coordinating body tasked with championing exporting FDI rms and domestic input-supplying the jobs issue and guiding the many actors from different rms. Government policies can provide foreign firms with sectors toward a shared future jobs vision. While the world incentives to source their inputs from local SMEs. At the is changing fast, Cambodia still has an opportunity to make same time, the government can help SMEs to understand this transition and improve the quality of jobs for all of its and meet the quality standards of FDI firms and provide citizens. them with financing to upgrade their production processes. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 10 MAIN REPORT Introduction measured by the Gini coefficient, fell from 32 to 28 between 2008 and 2012, largely due to the poorest 40 percent of the Cambodia’s economic growth and jobs transformation population having higher increases in consumption than the has been significant by global standards and has top 60 percent. Although Cambodia reached lower-middle- largely been driven by the government’s embrace income status in 2015, the vast majority of families still of an export-driven development strategy. Over the hover near the poverty line and are at daily risk of falling into period 2000 to 2015, Cambodia’s exports of goods and poverty in the event of an adverse shock. services—mainly garments and tourism—grew by nearly 20 percent annually and were the driving force behind the Two factors suggest that the current economic country’s (average) annual GDP growth rate of 7.9 percent development strategy may not continue to deliver the over the same period.1 The economy’s integration into the quality of jobs to which the Cambodian government global economy was the result of the government’s strategy aspires. First, the current export-driven development of attracting foreign investment into industries that played strategy may not be performing as well it could. to Cambodia’s comparative advantages: an abundant, Although Cambodia’s apparel sector has continued to add low-skilled, and highly mobile labor force and a stable jobs (at least up to 2015), the sector is under-producing jobs government that was eager to facilitate the movement of relative to global norms. Also, unit labor costs exceed levels foreign capital and goods. in competing textile-producing countries, offered wages are below aspirational wages, and foreign firms are not using This export-oriented strategy has created more, local suppliers of goods or services. While attracting FDI better, and more inclusive jobs in Cambodia than to low-value-added industries was an appropriate jobs existed at the beginning of the reform period. Since strategy during the period when Cambodia was first entering the late 1990s, 3.6 million net jobs have been created in the global economy, it may no longer be the best strategy services and industry (compared to 0.7 million agricultural for creating more, better, and more inclusive jobs going jobs), with nearly 1 million of those new jobs being in the forward. The potential loss of special access for Cambodia’s garment sector. Most of the jobs in the garment sector pay exports in important markets such as the European Union at least the minimum wage and offer a range of additional would further undermine key exporting industries and make monetary and non-monetary benefits, unlike most jobs in the it harder to attract FDI. domestic economy. Furthermore, they are highly inclusive jobs, in that they draw vast numbers of low-skilled young Second, domestic, regional, and global mega-trends women to the urban centers where the garment factories are changing what will be produced and how it will are located (Box 1). be produced, thus creating new job opportunities in some areas while destroying jobs in others. Incomes These jobs underpinned Cambodia’s rapid poverty are rising in Cambodia and Asia, and consumption is both reduction. Between 2004 and 2012, the poverty incidence increasing and diversifying into higher value-added goods under Cambodia’s national poverty line declined from and, especially, services. Urbanization is creating a larger 50 percent to 18 percent of the population. Inequality, consumer class that wishes to purchase goods and services Box 1: Jobs Definitions For the purposes of this report, a “job” will be de ned as any income-earning activity that is not illegal. Thus, a job may be as simple as the employment of a full-time worker, in a factory, who is earning a wage or as complex as the range of income-earning activities carried out by a household in various sectors at different times of the year. A “good” job is a subjective concept that depends on the economic structure, culture, and aspirations of a country, its industry, and its people. In the case of Cambodia at this time, the report will assume that a good job is characterized by high productivity, a wage commensurate with productivity levels, safe work conditions, and job security. An “inclusive” job can be de ned as one that is open to any Cambodian citizen regardless of gender, age, or ability, as well as one that integrates different segments of the economy into a single market. 1 Cambodia’s export expansion was only eclipsed by one other country in the world (Equatorial Guinea) and was far ahead of star exporters, including Vietnam (15.5 percent) and Bangladesh (15.3 percent) (World Bank 2017b) CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 11 MAIN REPORT that were previously self-produced. Demographic trends are policy options. The mapping of the policies recommended in shrinking the size of the workforce in Cambodia’s neighboring this document and those contained in the Phase IV of the countries (China, Thailand, Vietnam, and developed East Rectangular Strategy is shown in the policy matrix at the Asia) while creating new industries to serve a growing and end of this review, which also suggests the agencies that aging consumer class. Trade patterns are shifting due to might lead the reform process. new trade pacts, and China is becoming a lead country in GVCs. Technology is changing the nature of work across economies, from the smallest micro-enterprises to the Snapshot of Today’s Jobs: Cambodia’s largest sophisticated factories, and this is resulting in the creation of jobs that require more skills than ever before.2 Export-Oriented Development Strategy Has Uniquely Shaped its Jobs This report identifies the policy reforms that will be needed to overcome these challenges and to create Structure more, better, and more inclusive jobs in the future. We begin by reviewing the structure, source, and quality Cambodia’s economy supports many jobs of today’s jobs, arguing that Cambodia’s export-oriented strategy has been an important catalyst for creating new and There are 8.2 million jobs in Cambodia, and 160,000 better jobs.3 We then discuss the limitations of the current new workers enter the labor force every year. About 80 economic strategy for creating and upgrading jobs and go on percent of Cambodians aged 15 or older are working, which to describe the opportunities that the mega-trends are likely is among the highest rate globally and is far higher than to provide. Finally, we propose two strategies to enhance the expected labor force participation rate for a country at the quality and inclusiveness of Cambodia’s jobs. First, we Cambodia’s level of development (Figure 1a). This is partly argue that Cambodia needs to move towards Stage II of attributable to Cambodia’s very high female labor force FDI-driven development, wherein it should promote global participation rates (Figure 1b), which fluctuate between 73 integration by attracting higher-quality FDI and creating an and 80 percent compared with a regional average of 61 enabling environment and incentives to encourage foreign- percent and a global average of 50 percent. This is perhaps owned firms to develop closer links with the domestic not surprising given the predominance of traditionally private sector. Second, we recommend seven specific “female” industries in Cambodia’s economy, specifically reforms that need to occur within Cambodia to attract new garments and tourism. The size of the labor force is FDI to diversify the economy and to fully benefit from the job expected to continue growing until 2044 because Cambodia opportunities that it will offer. This report is the synthesis is one of the few countries with a young population in an of a detailed and comprehensive analysis presented in the aging region. Technical Report. The analytical findings and policy directions of this Although modern jobs are rapidly being report are intended to contribute to policymaking in created, the majority of jobs are still in two ways. First, it provides a focus on jobs. The government’s traditional sectors Rectangular Strategy for Growth, Employment, Equity and Ef ciency: Building the Foundation Toward Realizing the As of 2015, while 4 in every 10 jobs were in non-farm Cambodia Vision 2050 - Phase IV is comprehensive by public and private wage employment, the other 6 were design and addresses a wide range of policy objectives. in family farming, farm wage labor, and non-farm Most of the strategic sides of the respective strategic household enterprises (Figure 2). This is a very different rectangles are sector-specific. 4 In contrast, this report draws picture than less than a decade before when 8 in 10 jobs from across the strategy to pull together a range of policies were in traditional sectors defined as having employees that collectively will create more, better, and more inclusive who work in low-skilled (micro or small) firms that do not jobs. Second, while specific job strategies, particularly the abide by labor legislation (Figure 3). A sizeable share of National Employment Policy: 2015-2025, provide general jobs in non-farm wage work can also likely be classified directions, in this report, we attempt to provide more detailed as “traditional.” This report refers to traditional jobs as 2 In this report, we only list the mega-trends that are relevant to the jobs discussion. A longer and broader list is presented in Phase IV of the Rectangular Strategy. 3 This report does not explore the jobs situation in agriculture or policy options for creating better agricultural jobs. Since the nature of agricultural jobs is quite distinct from more market-based jobs, they merit a separate analysis. 4 The Rectangular Strategy is depicted as four strategic “rectangles” that encompass four aspects of development—human resources, economic diversification, private sector and job development, and inclusive and sustainable development—and each “side” of each rectangle is a (generally) sector-specific priority within the respective rectangle. Each side of the rectangle is underpinned by several policies. The four rectangles surround four “environment” concepts, and the core of the model is governance reform. The human resource development strategic rectangle is the priority for Phase IV. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 12 MAIN REPORT Figure 1: Labor Force Participation Rates in Cambodia and Comparator Countries (a) Total Labor Force Participation Rate 100% Cambodia Labor Force Participation Rate (age 15+) 80% Lao PDR Vietnam China Macao Thailand New Zealand Myanmar Indonesia Australia Singapore Nauru Malaysia Bahrain 60% Kiribati Philippines South Korea Hong Kong Vanuatu Fiji Mongolia Japan Papua New Guinea 40% Marshall Islands All countries (2015) Samoa EAP Comparators Trend 20% Cambodia trajectory, 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00 2007−2015 GDP per capita, PPP (log scale, base 10) (b) Female Labor Force Participation Rate 100% Cambodia Labor Force Participation Rate (age 15+) 80% Lao PDR Vietnam ChinaNew Zealand Macao Thailand Australia Singapore 60% Mongolia Malaysia Bahrain Vanuatu Myanmar South Korea Indonesia Hong Kong Kiribati Philippines Nauru Japan Papua New Guinea Fiji 40% Marshall Islands Samoa 20% All countries (2015) EAP Comparators Trend 0% Cambodia trajectory, 2007−2015 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00 GDP per capita, PPP (log scale, base 10) Source: Author’s estimates using CSES 2007-2015 and the WDI online database. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 13 MAIN REPORT work in non-wage family farms and non-farm household more than 500 workers) across the entire economy are the enterprises. It refers to modern jobs as wage-paying jobs source of 25 percent of wage jobs even though they only in non-farm industries. While the data do not allow us to comprise 0.4 percent of firms. In contrast, small enterprises estimate the number of these workers in Cambodia, in (those with 0 to 9 workers) constitute 97.8 percent of all Vietnam, for example, these workers comprise half of all firms but provide only 50 percent of all wage jobs. Foreign- (non-public sector) wage employees (Cunningham and owned firms also have a higher average number of workers Pimhidzai 2018). per firm than domestically owned firms. For example, foreign-owned firms in the apparel industry employ 850,000 Cambodia’s a rapid swing toward modern jobs is due workers, or an average of 2,800 workers per foreign-owned to the growth in non-farm wage employment, driven apparel firm compared with 115 workers per domestically by exporting and foreign-owned firms in the garment owned apparel firm. industry (Figure 3). The export-oriented textile, leather, and footwear sectors alone added more than 600,000 jobs While most job growth has been in manufacturing (net) between 2007 and 2011, representing more than and services, half of Cambodia’s jobs are still in 40 percent of total net employment growth. The increase family-owned firms and farms. About 3 million workers in private sector wage employment has been apparent report family farming as their main source of income, in rural areas (from 12 percent to 26 percent of all rural and another 1.4 million primarily depend on household jobs) as well as in urban areas (from 20 to 38 percent). enterprises. While the number of family farmers has fallen However, the growth in employment in export firms has significantly in recent years, the number of household been disproportionately driven by a small number of very enterprise owners is holding steady. The jobs picture can large firms. Large exporters constitute 10 percent of all be complex in rural households, where members tend to exporting firms but are responsible for 88 percent of all hold an array of different jobs (Figure 4). For example, many (direct) exporting jobs. Indeed, large firms (those employing non-farm household enterprises in rural areas also depend Figure 2: Job Type Distribution, 2015 Working 8,071k; 100.0% Owner/Self employment Wage Employment 4,483k; 55.5% 3,588k; 44.5% Farm HH Enterprise Farm Public Private Foreign 3,082k; 38.2% 1,401k; 17.4% 602k; 7.5% 398k; 4.9% 1,389k; 17.2% 1,199k; 14.9% Source: CSES 2015. Figure 3: Job Types, 2007 and 2015 9,000 8,000 7,000 Number of Jobs (‘000) 6,000 5,000 Family Farm 4,000 Farm Wage 3,000 2,000 Non-Farm Wage Employment (Private) 1,000 Non-Farm Wage Employment (Public) 0 Non-Farm Household Enterprise 2007 2015 Source: World Bank staff estimates using CSES 2014. Working age population estimate from UNPOP. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 14 MAIN REPORT on income earned from agriculture, private wages, or other value managers, professionals, technicians, and associate sources. On average, rural households earn most of their professionals (Table 1). However, trends suggest that job income from off-farm jobs, with only 24 percent derived quality is improving. The fastest growing jobs are in semi- from agriculture (Figure 5). skilled occupations such as construction and manufacturing (especially garments) and in semi-skilled white-collar jobs (Table 2).5 More importantly, within occupational categories By many measures, job quality is improving there is a shift away from subsistence occupations and but remains low towards market occupations that require similar skills. For example, a decline in the number of street and market The Cambodian labor market primarily provides sales assistants is being accompanied by a rise in the low-quality jobs, but there are some signs that employment shares of shop sales assistants. Similarly, this is changing. More than 66 percent of jobs are in subsistence agricultural is declining as wage employment agricultural, forestry, fisheries, or elementary occupations in agriculture increases. (such as security guards, office cleaners, and tuktuk drivers). In contrast, fewer than 5 percent of jobs are high- Figure 4: Composition of Household Employment, 2014 100% Only Non-Farm Enterprise (NFE) 80% NFE + Ag. SE Share of Households NFE + Private Wage 60% NFE + Other Only Agriculture 40% Self-Employed (Ag. SE) Ag. SE + Private Wage 20% Ag. SE + Other Only Private Wage 0% Private Wage + Public All Female Head Male Head Rural Urban Source: World Bank staff estimates using CSES 2014. Figure 5: Composition of Household Income, 2014 100% 10 6 15 5 4 2 80% 20 Share of Total Income 34 42 60% Wage and salary 24 1 Agriculture 4 40% Non-Ag. Self employment 48 40 45 20% Transfers 0% Other Female Male Rural Source: CSES 2015. 5 Men are increasingly moving into both these types of occupations whereas women are only increasing in the latter category. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 15 MAIN REPORT Although Cambodia’s job growth so far has been driven Real wages have been increasing, with those at the by low-knowledge jobs, the country’s occupational bottom of the wage distribution gaining more than profile is showing signs of becoming more knowledge- others. Average real wages grew by over 54 percent intensive. Even in the short period between 2009 and 2015, between 2009 and 2015. By 2015, only 2 percent of there has been a significant increase in knowledge-intensive Cambodian jobs paid wages below the international poverty jobs in Cambodia, while growth in manual tasks has been line. Furthermore, the lowest wages increased at a faster stagnant or negative (Figure 6). Although the number of rate than the highest wages, resulting in a decline in wage knowledge-intensive jobs is still low, trends suggest that this inequality. is beginning to change. Table 1: Table 2: Employment by Main Occupation, 2004 and 2014 Ten Fastest Growing Occupations, 2009 and 2014 2004 2014 2009 2014 Armed forces 0.9% 0.8% Garment and +4.4% +10.2% related trades workers Managers 1.3% 0.8% Building frame and +0.5% +2.8% Professionals 3.8% 2.6% related trades workers Technicians and associate General office clerks +0.8% +2.6% 0.6% 1.1% professionals Agricultural, forestry, +6.3% +6.9% Clerical support workers 0.2% 3.9% and fishery laborers Service and sales workers 13.6% 15.3% Shop salespersons +5.0% +6.0% Skilled agricultural, forestry, Waiters and bartenders +0.3% +0.8% 58.7% 37.8% and fishery workers Building finishers +0.2% +0.8% Craft and related workers 6.1% 20.3% and related trades workers Plant and machine operators Tellers, money collectors +0.2% +0.7% 6.1% 3.9% and related clerks and assemblers Hotel and office cleaners and +0.1% +0.3% Elementary occupations 8.4% 13.4% helpers and building caretakers Total 100.0% 100.0% Moto-taxi and tuktuk drivers +1.2% +1.5% Source: World Bank staff estimates using CSES 2004-14. Source: World Bank staff estimates using CSES 2009-14 Note: Occupations in the three-digit ISCO that have an employment share of at least 0.1 percent. Figure 6: Growth in Employment Share of Tasks, by Task Type, 2009-2015 Cognitive tasks have gained the largest employment share over the period 3 Task Intensity Measures 2 Analytical Managerial interpersonal 1 Repetitive mental 0 Repetitive physical Non-repetitive physical -1 Social 2009 2010 2011 2012 2013 2014 2015 Source: World Bank staff estimates using CSES 2009-15, and O*NET database on skills associated with different occupations. Note: Aggregate task intensity measures follow the classification used in Autor and Acemoglu (2011). Task intensity scores are standardized by the mean and standard distribution of the scores in non-subsistence occupations weighted by the labor share of those occupations in 2009. Sample restricted to non-subsistence occupations in all years. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 16 MAIN REPORT Box 2: The Impact of Minimum Wage in the Garment Sector Cambodia has an unusual minimum wage scheme. It is only applicable to the garment and footwear sectors, the country’s two largest manufacturing exports of the country. The minimum wage legislation was put in effect in 1997. It was initially set at USD 40 per month and was gradually increased eight times, reaching USD 170 per month by January 2018. Although the nominal minimum wage increased by over 380 percent in the period, the real value of the minimum wage was below its 1997 level until the increase in January 2015 (see ILO 2016 for a detailed review). In addition to the minimum wage set by the government, employers in the garment and footwear sector are required to pay mandatory allowances to their workers. These consist of allowances for: (i) transportation and accommodation (USD 7 per month); (ii) attendance (USD 10 per month); (iii) overtime meals (USD 0.5 per day); and (iv) a seniority bonus (USD 2 to 11 per month) after two years of employment,. A recent study examined the impact of minimum wage changes in Cambodia’s garment sector between January 2009 to January 2015 on the labor participation, working hours, and total earnings of garment and non-garment workers. It found that the minimum wage increases: • Did not affect the participation rates of garment workers, non-garment wage workers, or non-wage workers. • Raised average hourly real wage earnings for wage earners in the garment sector (by 2.8 percent) but reduced average hourly real wage earnings for those outside the garment sector (by 1.4 percent). These changes are of modest magnitudes relative to the size of the minimum wage increases during this period, which were 20 to 33 percent increments. Why? Most workers in the garment sector already earned above the increased minimum wage. Average wages for garment workers still increased as these wages were anchored to the minimum wage, but the increase was less than the proportional increases. An increase in the minimum wage raises the wages not only of the lowest paid workers but also of workers higher up the earnings distribution. In fact, the gains for the higher-earning garment workers were slightly larger than the gains for the lower-earning garment workers. • Did not affect total household wage earnings. Instead, households reduced their working hours to maintain their same household earnings. However, the moderately positive impact of minimum wage hikes that were observed in the study may not be sustained in the future. During the study period, the overwhelming majority of garment sector workers were already earning more than the subsequent increase. If minimum wages increase faster than productivity (and wage) increases among the lowest paid workers, future hikes may have a different impact than past increases. Empirical evidence from countries in East Asia and Latin America has consistently shown that, when the minimum wage is close to the market wage, it begins to have a positive impact on the earnings of minimum wage earners while causing more job losses. It is not possible to predict the level at which the minimum wage might begin to have a negative impact. Instead, it will be necessary to begin to monitor the impact of minimum wage increases and for policymakers, trade unions, and employers to determine the degree of labor market distortions that are an acceptable trade-off. Sources: Shrestha (2019), de Carpio (2014), and Cunningham (2007). Considering job quality from the perspective of Household enterprises are an important source of employers, labor productivity is growing even though job creations, but their workers are more likely it is under-performing on many measures. Between than wage workers to earn below the garment 1993 and 2015, labor productivity in Cambodia grew by and footwear sector’s minimum wage. The share of 3.6 percent. Exports partly drove this gain, with output per household enterprises in total jobs (17 percent) is projected worker having grown by 11.6 percent between 2004 and to grow as a result of rapid urbanization. About one quarter 2011. Among large firms, particularly domestic firms, these of all rural households and one half of all urban households productivity increases have been robust. operate a non-farm enterprise. The average earnings of household enterprises are higher than the average wages of CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 17 MAIN REPORT wage earners, but since they work longer hours, their hourly under the age of 5 are more likely to operate a household earnings fall below those earned in a wage job in a private enterprise. This suggests that, although they end up working firm (Figure 8). In addition, the share of workers earning more hours in a day than they would in a wage job, the work below the monthly minimum wage is higher for household is flexible enough for them to provide childcare while working. enterprise workers than for wage workers in the private Similarly, a large sample survey in Vietnam found that sector (37 percent in household enterprises compared to household entrepreneurs regarded the independence and 30 percent for wage workers). the opportunity to balance work and life as positive reasons to operate a household enterprise (Pasquier et al. 2018).6 While operating a household enterprise often entails These household enterprise owners reported that these jobs longer working hours and earning more variable paid better than agriculture jobs, provided a quality of life income than holding a wage job does, it can offer that is not feasible in formal wage jobs, and were far more non-monetary benefits. For instance, women with a child accessible than more lucrative public sector jobs. Figure 7: Hourly Earnings of Household Enterprise Workers and Wage Workers 1.0 Smoothened density 0.8 0.6 0.4 0.2 Wage worker 0.0 Household enterprise worker 3 4 5 6 7 8 Log (hourly productivity) in all areas Source: Author’s estimates using Cambodia CSES 2014. Note: The productivity of wage workers is the monthly wage earnings per the number of hours worked. The productivity of a household enterprise worker is the share of profit accruing to the worker for every hour worked in the enterprise. Only those whose main occupation is wage work or household enterprise work were used in the estimation. Figure 8: Gender Wage Gap All factors Industry and occupation Location Demographics Education Actual wage gap 0.75 0.80 0.85 0.90 0.95 1.00 Women’s Earnings per Dollar of Men’s Earnings (Cents) Source: World Bank staff estimates based on the CSES 2015. Note: Assumes that men and women are equal in terms of each characteristic and occupation/industry. 6 This study also found that nearly 80 percent of household enterprise owners cited positive reasons for owning an unincorporated business, including earning a better income (34 percent), independence (14.6 percent), family tradition (9.9 percent), or the ability to balance personal and professional life (14.6 percent). Women were particularly likely to cite the last response. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 18 MAIN REPORT The current economic structure has served by women taking less lucrative jobs within the same some populations better than others sector, women being more likely to trade off wage gains for non-wage benefits (Chowdhury et al. 2018), gender Two in three jobs are excluded from the modern discrimination by employers, women’s unequal bargaining economy. The modern and traditional sectors are weakly power in wage negotiations, or a host of other factors that integrated, with the 60 percent of workers in family the data cannot capture.7 farming and household enterprises primarily trading among themselves. As will be discussed below, more traditional jobs grow alongside more modern jobs in Cambodia, but Figure 9: nevertheless very few formal links exist between them. This Source of Employment, by age lack of integration limits the opportunities for improving the 100% Share of Working Age Population quality (for example, earnings and productivity levels) of jobs in the sectors with the largest employment shares. 80% Modern wage-earning jobs are also concentrated in 60% a few regions, largely due to geographic or economic factors. Most of Cambodia’s firms are located along two 40% main corridors: Phnom Penh and its surrounding areas, which accounts for a quarter of modern jobs, and the 20% southern part of the country, which accounts for 40 percent 0% of these jobs. The other regions account for slightly more 15 20 25 30 35 40 45 50 55 60 65 than a quarter, with the eastern region representing 5 Age percent of jobs. Foreign wage Dom. wage Public wage HHE Cambodia’s economy presents different opportunities Non−wage farming Wage farming Not working and barriers to women and men. The large garment and hospitality industries have been an ample source of jobs for Source: Authors’ estimates using CSES. women, with 17 percent of female workers being employed in the sector. The recent strong growth of the construction industry has benefitted men. Increased job opportunities for While the school-to-work transition is a challenge women has meant higher returns to education for women. for younger workers, older workers fare worse in The gender gap has shrunk from 30 percent for those with no the labor market. Older workers are disproportionately education to 5 percent for the tertiary educated workforce. employed in lower productivity family farming or in household However, the average gender wage gap is similar to that in enterprises compared to new labor force entrants (aged 15 other economies. As of 2014, Cambodian women earn, on to 24) (Figure 9). Young workers dominate private sector average, 85 cents for every dollar of wages earned by a male employment, both foreign and domestic—which often worker (Figure 8, the “actual wage gap”) compared with 88 provides better wages—while the older population finds it cents in Vietnam (Cunningham and Pimhidzai 2018). The difficult to transition into the fastest growing area of the gap can be attributed to women’s lower education levels, to economy.8 Young people are particularly active in joining the household gender roles, and to the industry and occupation fast-growing manufacturing and construction sectors. Only of employment; the expected earnings of women increase 10 percent of workers aged 45 to 59 work in these sectors after controlling for these factors (Figure 8). However, even as opposed to nearly one-third of workers aged 20 to 29. equalizing across these factors, there is still an unexplained This disparity might exist because these jobs require skills gap with women earning an estimated 92 cents for every and manual abilities that older workers have not acquired or male dollar (Figure 8, “all factors”). This may be caused can no longer achieve. 7 Within the broad occupation categories and after accounting for education levels, women are more likely than equally educated men to be engaged in tasks that require fewer cognitive, managerial, and manual skills. Instead, women tend to work in occupations that use more interpersonal skills such as social perceptiveness. 8 A similar trend was observed in Vietnam in the panel data that provide employment information for 2012 and 2014. The transition matrices show that youths (aged 16 to 24) have a higher propensity than any other age group for transitioning into formal sector wage employment, especially into jobs in the FDI sector. In contrast, older workers did not have a significant rate of transition into these sectors (Cunningham and Pimhidzai 2018). CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 19 MAIN REPORT The Current Export Strategy May Weak employment growth in FDI and domestic Not Deliver the Future Jobs to Which firms challenges better jobs Cambodia Aspires Given its sectoral composition and recent growth, Cambodia’s apparel sector could be delivering more Although the current export strategy has not yet jobs. Indeed, the apparel sector is known to be labor- reached its limits, it may not deliver the type of intensive compared to other sectors globally. Figure 10 jobs that Cambodia wants and needs in the future. plots the average employment elasticity (to sales) against The returns to Stage I global integration (see Box 3) are per capita GPD for all garment firms across a range of decreasing as a result of: (i) weak employment growth countries. Here again, Cambodia stands at the bottom of partly driven by low productivity, high unit labor costs, and the distribution with elasticity lower than in other countries a low-skilled labor force; (ii) weak links between the FDI at a similar level of economic development. This suggest sector and the rest of the economy (where most jobs are); that firms could be generating more jobs given the country’s and (iii) the concentration of the country’s exports in low level of development and the sectoral composition of its sophisticated sectors. This implies that, for Cambodia to growth (Figure 10). improve the quality and increase inclusiveness of its jobs, it will need to find a new engine of growth by moving up to Stage II of global integration. Box 3: The Stages of Global Integration for Development and Jobs Global value chains (GVCs) and the ows of foreign direct investment associated with them can provide developing countries with a short-cut to economic development and higher quality and inclusive jobs. However, becoming integrating into GVCs is not a one-off event but rather a cumulative, multi-stage, deliberate process. Stage I: Entering global production networks. This involves leveraging the country’s comparative advantage to attract foreign investors. This usually means offering: (i) abundant, low-skilled labor; (ii) a friendly business climate for tangible and intangible assets; (iii) few regulatory or restrictive measures on trade and investments; and (iv) a stable regulatory and political environment to attract multinational corporations that will provide low value-added jobs in GVCs. Stage II: Attracting higher value-added FDI and increasing domestic densi cation. Countries can expand and strengthen their participation in GVCs by becoming competitive in higher-value-added products, tasks, and sectors. Densification—engaging more local actors in the production network—is also desirable at this stage. Not only will domestic private firms benefit from doing business with multinational corporations, but it will also give them an opportunity to learn and to increase their productivity-led growth. In order for an economy to move into this stage, it will need a labor force with the relevant skills, absorptive capacity, and strong links between domestic firms and GVCs. Stage III: Sustainability. Once an economy is at this stage, the domestic sector is sufficiently robust that it does not depend on the presence of FDI firms. In fact, as China has shown, domestic firms may have become the lead companies in GVCs. However, in order to sustain the GVC-centric approach to development, policymakers need to pay keen attention to the macroeconomic, social, and environmental sustainability of the economy’s global integration. Source: Taglioni and Winkler (2016) CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 20 MAIN REPORT Figure 10: Employment Elasticity to Sales Growth for Apparel Firms 8 Employment−to−Sales Growth Elasticity 6 4 Countries from WB ES 2 Cambodia 95% CI 0 Fitted values 0 5,000 10,000 15,000 GDP per Capita Source: World Bank Enterprise Surveys that contain a large share of garment firms. Note: The “employment-to-sales growth elasticity” (€) is the percent increase in employment for every 1 percent increase in sales. Thus, € = 0 means that employment is not responsive to sales growth while € = 1 means that employment growth is exactly equal to sales growth. The figure shows that employment is not very responsive to sales growth in Cambodia, even when compared to countries of similar level of development. Figure 11: The Lifecycle of a Firm 8 7 US - manufacturing Average Employment (Firm Age <5=1) 6 Maxico - manufacturing 5 India - manufacturing 4 Vietnam 3 Cambodia - manufacturing 2 1 Cambodia - all firms 0 Cambodia - firms above <5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40 10 employees Age Source: Author’s calculations for Cambodia. Hsieh and Klenow (2014) for India, Mexico, and the US. Note: The base is a firm that has been operating less than five years. The graph plots the relative size of firms at different ages relative to the base firm in Cambodia, Mexico, India, the US, and Vietnam The possible loss of trade preferences in the near which accounts for 40 percent of the country’s merchandise term would also hamper Cambodia’s competitiveness exports and enables it to pay zero tariffs. in key export markets. Cambodian exports currently have preferential access to the US market under the Cambodia’s domestic sector is similarly stunted. Generalized System of Preferences (GSP) and to the EU Cambodia has many young firms. Nearly 60 percent of firms market under the Everything But Arms (EBA) scheme. have been operating only for between one and five years, which This preferential access is granted based on Cambodia’s is among the largest shares in an 18-country comparison of level of economic development. As the country continues developing economies. These firms are a significant source of to climb the development ladder, this preferential access job creation in Cambodia, in that they employ a higher share can be expected to be withdrawn. Furthermore, Cambodia’s of the workforce than all but one other country in the sample. special access in the EU market may be lost much sooner However, those young firms tend not to grow. The size of their as the European Commission recently informed Cambodia labor force remains the same for up to 30 years, unlike new that it launched a procedure to temporarily withdraw tariff firms in Mexico and Vietnam, which start to grow from early preferences granted under the Everything Bur Arms (EBA) on in their development (Figure 11). The stagnant growth of arrangement over concerns related to serious human and Cambodia’s domestic firms can be attributed to the limited labor rights violations. This will have an immediate negative skills of the workforce, high production costs, the high costs impact on Cambodia’s competitiveness in the EU market, of doing business, and a lack of entrepreneurial capability. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 21 MAIN REPORT Labor productivity lags behind other fastest growing sectors—actually declined between 2005 countries’ and unit labor costs are high and 2015 (Figure 13). Third, recent productivity gains have been fueled by the real estate and the financial sectors Compared to other countries, Cambodia’s productivity rather than by more productive sectors. Fourth, Cambodia’s levels and labor productivity growth are disappointing. business environment may be constraining investment and Firm productivity in Cambodia’s manufacturing and garment job creation. Sound business regulations are important for sectors is on a par with that of Myanmar and Bangladesh, but a thriving private sector and essential for the health of an lags far behind that of Vietnam and the Philippines (Figure economy as a whole, but Cambodia’s regulatory regime is 12). This is due to a range of factors. First, Cambodia has generally not conducive to the establishment and growth a history of slow labor productivity growth, which averaged of businesses, especially SMEs. While the country has only 3.6 percent in the 22 years between 1993 and 2015 significantly improved its investment climate, it still lags compared to annual productivity gains of 5 percent in behind many other countries, both regionally and globally, Vietnam and 7 percent in Thailand during the same period. in terms of the ease of doing business. Cambodia ranked Second, the value-added associated with Cambodia’s 138th out of 190 economies in terms of “ease of doing export basket is lower than it should be given Cambodia’s business” in the Doing Business 2019 report (World Bank level of development and has been falling over time, with 2019). An investment climate assessment undertaken for textiles having particularly low productivity gains. In fact, Cambodia by the World Bank in 2018 identified a number of labor productivity in garments and construction—two of the challenges that are discussed in Box 4. Figure 12: Firm-level Productivity and Capital Intensity, 2016 Nicaragua Vietnam Guatemala Thailand Philippines Bangladesh Capital Intensity Cambodia Median Productivity (garments) Myanmar Median Productivity (manufacturing) 0 3,000 6,000 9,000 12,000 Value Added/Capital per Worker (2009 USD) Source: World Bank Enterprise Surveys. Figure 13: Productivity in Agriculture and Industry 16 14 Trillion riel (year 2000 constant) 12 10 8 6 4 Agriculture Construction 2 Garments 0 Other Industry 2004 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Author’s calculations using national accounts, CSES, and ILO data sets. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 22 MAIN REPORT Box 4: Cambodia’s Investment Climate Assessment In 2018, the World Bank carried out an investment climate assessment for Cambodia that focused on regulations that affect business start-ups and operations, trade costs, and links between FDI rms and small and medium-sized enterprises. The assessment found that the high costs involved in establishing and operating rms are the most binding constraint to private sector development and sustained growth in Cambodia. The country is one of the most difficult places in the world to register a business and receive a construction permit, ranking 185th and 179th respectively for “starting a business” and “dealing with construction permits” out of 190 countries on the World Bank’s 2019 Ease of Doing Business Index. This makes it clear that the current regulatory framework for business in Cambodia needs modernizing. Trade costs make up a signi cant share of the total operating costs of Cambodia’s importers and exporters, particularly FDI rms, most of which are export-oriented. Transport and logistics contribute 14 percent of total exported value-added from Cambodia, both directly and indirectly through forward links. This is double the size of the contribution of these sectors in Thailand and three and a half times of those in Malaysia or Vietnam. Reducing trade costs will not only enhance the competitiveness of existing FDI firms but may also attract more sophisticated FDI into the country. Cambodia has the fewest links between FDI rms and SMEs both in the region and globally. Foreign-owned manufacturing firms in Cambodia imported about 95 percent of their production inputs, by far the most among Cambodia’s peer countries. Supply chain links do not happen automatically but tend to be a function of multiple factors including the spillover potential of FDI, the absorptive capacity of domestic firms, and the host country’s investment climate and institutional environment. The assessment found that there is clearly much potential for increasing FDI spillovers into the domestic market. Source: World Bank (2018b) Figure 14: Average Wages and Unit Labor Costs in Apparel Firms (a) Average Wages (b) Unit Labor Costs 8,000 80% 70% Share of Value Added 6,000 60% USD (Base 2010) 50% 4,000 40% 30% 2,000 20% 10% 0 0% My ia Vie y ia ia ia y h es r es ca r am h am pia pia Pa a a Ph stan tan ma ma e ke gu gu es es Ind od Ind od rk pin pin hio hio tn tn r kis lad lad ra ra an an mb Tu mb Tu ki Vie ilip ilip ca Et Et Pa My ng ng Ca Ca Ni Ni Ph Ba Ba Source: World Bank Enterprise Surveys Unit labor costs, rather than wages, may be countries at Cambodia’s level of development (Figure constraining the further expansion of jobs in the 14a). However, productivity in the garment sector has not garment and other export-oriented sectors. The increased proportionately. Instead, unit labor costs—the rapid increase in the minimum wage in recent years has cost of workers per unit of production—are currently successfully closed the wage gap between garment sector significantly higher in Cambodia than in other garment- workers and those in other sectors. It has also put Cambodia’s producing countries, putting Cambodia at a competitive garment sector wages on a par with the global norm for disadvantage (Figure 14b). CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 23 MAIN REPORT Exports are concentrated in low-value low-quality, low sophistication, and highly substitutable activities garment sector. Cambodia’s exports, and export jobs, are concentrated The country’s underperformance on jobs can be in low value-added segments of GVCs.9 Cambodia’s attributed to the low level of sophistication of its current position in the value chain may not be able to deliver exports compared to its regional peers.10/11 For the future jobs to which Cambodia aspires. The majority of example, Cambodia’s export basket contains more low FDI firms in Cambodia are export-oriented and efficiency- value-added products than the export baskets of its peer seeking, and they have overwhelmingly reported that low countries (Figure 15). This is partly due to Cambodia’s heavy labor costs, tax incentives, and tariff preferences were their reliance on the apparel sector in its export basket. Even in top reasons for selecting the country as an investment textiles and apparel, Cambodia’s exports pay a lower labor destination (World Bank 2018b). Many FDI firms are in the remuneration rate for every unit of exports than do those of other comparator countries (Figure 16). Figure 15: Median Value-Added of Exports 100 EXPY Median Value Added 80 Cambodia (PPP thousands) 60 Lao PDR Malaysia 40 Myanmar Nepal 20 Thailand 0 Vietnam 2000 2002 2004 2006 2008 2010 2012 2014 2016 Year Source: World Bank staff calculations using data from UN Comtrade, the World Bank’s Business Environment and Enterprise Performance Surveys, and Shirotori et al (2010). Figure 16: Total Labor Content Share of Apparel and Textiles in Gross Exports (a) Apparel (b) Textiles 35% 35% Labor Value Added of Exports 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011 Year Year Cambodia Lao PDR Malaysia Nepal Thaland Vietnam Source: World Bank staff calculations using LACEX database. 9 Global value chains can be defined as a production process in which the separate activities to take a product from idea generation to final purchasing may take place in several different countries. 10 The labor sophistication of exports is a weighted average of export labor market outcomes such as the median wage, the median value-added per worker, the ratio of skilled to total workers, output per employee, years of schooling, and capital stock per worker. 11 These regional peers are Lao PDR, Malaysia, Myanmar, Nepal, Thailand, and Vietnam. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 24 MAIN REPORT Although the export sector and FDI firms create skills, teamwork, problem solving, and managerial skills more jobs per firm than non-exporters and domestic as especially important for jobs in large firms. Small and firms, experiences in other countries suggest that medium-sized enterprises, exporters, and foreign firms (in higher value-added jobs could be extracted from SEZs) are particularly affected by the low-skilled labor force. these sectors. This would enhance the inclusiveness of The lack of skilled labor not only hinders production and Cambodia’s jobs since workers in FDI firms tend to be female reduces current profits, but it also slows down business and young. While these firms have higher productivity and, development (because of delays in R&D) and leads to bad more recently, better wages and work conditions than other conditions for workers who have to take on a large workload. businesses in Cambodia, they still lag behind those of other In short, the current workforce does not have the right skills countries. for the current jobs market. Low labor productivity is also exacerbated by the Low skill levels and returns to education low level of investment. Rather than investing in capital underpin low labor productivity that complements and raises the productivity of labor, FDI firms in Cambodia mostly use labor as the main Cambodia’s low labor productivity can partly be production factor. attributed to the particularly low skill level of its labor force. Eighty-five percent of today’s labor force has The skills deficit is a structural constraint to not completed secondary school, averaging only 6.3 years increased labor productivity owing to the lack of an of education, and this education is not very good. Workers effective skills development system to upgrade the who have only one year of education and those with 11 skills of the existing labor force. Assuming that today’s years of education have similar levels of wages. Only those educational attainment improvement rates continue into who completed secondary school receive any labor market the future, only half of Cambodia’s labor force will have rewards for their higher education attainment (Figure 17). completed secondary school by 2045. This suggests that the education system is not a solution to the current stock of Cambodia’s firms are affected by the low skill level workers, who will constitute the largest share of Cambodia’s (and low productivity) of the current workforce. More workforce for many generations. Instead, the skills of today’s than 17 percent of firms surveyed by the World Bank’s workers need to be quickly upgraded to meet labor demand. Enterprise Surveys identified an “inadequately skilled labor However, Cambodia’s public and private skills development force” as a constraint to doing business, surpassed only system is fragmented and small (Figure 19), and reform by Lao PDR in East Asia (Figure 18). The firms require a efforts so far have focused on setting standards rather than mix of hard and soft skills and specified foreign language developing feedback mechanisms from the ultimate clients Figure 17: Rate of Return to Education 100% 80% (relative to receiving no schooling) Returns to Year of Schooling 60% 40% 20% 0% -20% 1 3 6 9 12 College+ Years of schooling Source: World Bank staff calculations using CSES 2014 Note: Y-axis graphs the estimated increase in earnings of each additional year of education. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 25 MAIN REPORT Figure 18: Share of Employers Who Are Affected by An Inadequately Skilled Labor Force 25% 20% Share of Employers 15% 10% 5% 0% Vietnam Myanmar Philippines Indonesia East Asia Bangladesh Sri Lanka Cambodia Lao PDR and Pacific Source: World Bank’s Enterprise Survey, 2016 Figure 19: TVET Enrollment 80,000 60,000 40,000 20,000 0 Short Courses/Level I Short Courses/Level I Short Courses/Level I Short Courses/Level I 2012-2013 2013-2014 2014-2015 2015-2016 Source: Ministry of Vocational Training and Labor, 2012-2016 Figure 20: Percentage of Second Grade Students who Perform below Proficiency on Reading Assessments (EGRA) Cambodia Lao PDR Philippines Myanamar 0% 10% 20% 30% 40% Source: Adapted from World Bank (2018a). Notes: The Early Grade Reading Assessment (EGRA) measures the percentage of students in second grade who are unable to read a word. The assessments were done in Cambodia (2012), Lao PDR (2012), Myanmar (2015), and the Philippines (2014). CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 26 MAIN REPORT (the employers) or creating results-based incentives for While internal migration may have been necessary for training institutes. Only 22 percent of registered Cambodian the rapid growth of manufacturing jobs, international employers offered formal training courses, compared to an emigration from Cambodia exacerbates the skills average of 57 percent in the East Asia region as a whole. shortage. Nearly 90 percent of internal migrants surveyed in the year 2011 had moved for jobs (MoP 2012), and both The education system is not producing a future labor men and women found them in urban areas and in other force that will be able to meet Cambodia’s future jobs countries. Nearly 1 million Cambodian citizens are living challenges. While educational attainment is increasing, the outside of Cambodia (Testaverde et al. 2017). Both internal quality of education is lagging far behind. All second-grade and international migrants tend to have completed higher students should be able to read basic text, but one-third of levels of education than those who do not migrate. Recent Cambodia’s second graders cannot read one word—which estimates suggest that 15 percent of Cambodian tertiary means that they are performing even worse than students graduates have migrated to OECD countries. Migration in Cambodia’s less-developed neighboring countries (Figure has resulted in a net drain of Cambodia’s human capital 20). Furthermore, over half of Cambodian sixth-graders (Figure 21). Most migration is through informal networks, have a “below basic” knowledge of mathematics. This poor- with half of migrants following earlier migrants from their quality education is eroding the gains made in educational own communities. This may lead to poor job matching upon attainment. While four-year-old Cambodian children today arrival, as the migrant’s job options are likely to be limited. are expected to complete 9.5 years of school, their learning While migrants, particularly women, send money home in will be equivalent to only 6.9 years of school in other an amount equal to 3 percent of GDP in the year 2015 (Roth countries as a result of poor educational quality. The quality and Tiberti 2017), it is not clear whether the recipients use of schooling is much worse in rural areas than in urban these resources to invest in and enrich the local economy areas. As jobs become more knowledge-intensive (Figure 6), or whether they simply use them to fund consumption. Cambodia’s new workers will be at a particular disadvantage Furthermore, the extent of return migration and their job- by being unable to engage and thrive in these jobs. related activities are largely unknown.12 Figure 21: Net Effect of High-Skilled Emigration on the Share of High-skilled Workers in ASEAN Source Countries 1.5% 1.0% Change in Share of High-Skilled Population Due to Emigration 0.5% 0% -0.5% -1.0% -1.5% -2.0% Thailand Indonesia Philippines Malaysia Cambodia Vietnam Lao PDR Source: Beine, Docquier, and Rapoport 2008. 12 Though migration is an important component of the Cambodia jobs story, this report does not include additional analysis on this subject due to an absence of relevant data. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 27 MAIN REPORT Figure 22: Inputs and Supplies Locally Sourced by Garment Firms 100% Share of Inputs Sourced Domestically 80% 60% 40% 20% 0% Bangladesh Cambodia Ethiopia India Myanmar Pakistan Turkey Vietnam (2013) (2016) (2015) (2014) (2016) (2013) (2013) (2015) Source: World Bank’s Enterprise Surveys. Figure 23: Correlation between Wage Employment and the Number of Non-farm Enterprises Garments and Footwear Non-Garment Domestic Manufacture Non-Garment Foreign 12 12 12 10 10 10 8 8 8 Log (# HH enterprise) 6 6 6 0 1 2 3 4 5 0 1 2 3 0 1 2 3 4 Domestic Tourism Domestic Construction 12 12 10 10 8 8 Log (# enterprise) in Province x rural/urban Linear fit 6 6 0 1 2 3 4 0 1 2 3 4 Log (wage employment) in Province x rural/urban Source: Author’s estimates from Cambodia SES 2014. Note: The regression line is weighted by the population of the rural/urban cells of each province. The title of the subplot represents the change in a particular wage employment type. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 28 MAIN REPORT Links with the domestic sector are weak activity than other exporters in the region. In 2016, 4.4 percent of firms in Cambodia supplied inputs for export Cambodian foreign-owned firms have comparatively production compared with an EAP average of 3.7 percent. low spillovers to domestic firms. Two-thirds of the value However, the percentage of total inputs and supplies (and related wages) created through exports is derived from sourced domestically is low in Cambodia compared to the jobs that produce goods (or services) for direct export. The region, both in textiles (as noted above) and overall. For other one-third of value is created in domestic firms that example, only 20 percent of inputs are locally sourced in provide inputs to exporting firms (local sourcing). In Vietnam, Cambodia compared to closer to 60 percent in Vietnam the shares are half and half, suggesting that Cambodia’s and 40 percent in Myanmar. Increasing these links with exporters are creating fewer job opportunities among local domestic suppliers will not only create more jobs, but may producers than they could. also help retain FDI firms in Cambodia. The weak links between FDI firms and local suppliers Private sector employment, including in foreign-owned are partly driven by the dominance of the garment firms, can also promote household enterprises. Those industry in FDI. It is common for FDI firms in the garment provinces in Cambodia with the most garment factories also sector to source from their global suppliers rather than have more household enterprises, as it has been found that domestic firms. However, even within the garment industry, provinces with 10 percent more garment workers have 1 they have weak links with the local economy. Only 25 percent more household enterprises. These household percent of Cambodia’s garment firms buy inputs and enterprises may cater indirectly to the industry by providing supplies from local providers—which themselves may or goods and services to the workers in the firms, or they may may not be Cambodian—compared with 60 percent in benefit generally through greater economic activity in these Vietnam, 62 in Bangladesh, and almost 100 percent in India provinces that have plentiful wage work. For example, areas (Figure 22). Instead, Cambodians FDI garment firms import with many garment factories also have a higher incidence of nearly all of their inputs from neighboring countries, which household enterprises engaged in retail and transportation. are then assembled in Cambodia and exported to the US Also, areas with many domestic-owned manufacturing firms and European markets as final products. Thus, there is little have a higher incidence of household enterprises in retail value addition taking place, undermining the support that and manufacturing. Similarly, tourism promotes retail shops exports give to workers in Cambodia. and enterprises in the hospitality sector (Figure 23). Private enterprises generate indirect links as well by providing Cambodia is in a position to support more jobs goods and services for consumption by workers in these through domestic links with exporting firms than factories. The growth of the private sector is also associated it currently does. Cambodia has greater indirect export with growth in household enterprises. Figure 24: Export Growth to the EU and EUR/USD Exchange Rate 120% 10% Change in EUR/USD Exchange Rate 100% 5% Change in Exports to EU 80% 60% 0% 40% 20% -5% 0% -10% -20% -40% -15% Q2 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q2 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Exports to EU, yoy EUR/USD, quarterly change Poly. (Exports to EU, yoy) Poly. (EUR/USD, quarterly change) Source: European Central Bank, IMF Directions of Trade Database. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 29 MAIN REPORT Macroeconomic risks also create jobs risks populations, which means potentially more and higher value jobs for Cambodia. Cambodia has been able to maintain strong growth and macroeconomic stability under dollarization, but Second, several new countries entering GVCs, this may hinder the jobs strategy going forwards. along with emerging technologies and shifting The limitations of dollarization for Cambodia have become trade agreements will affect global trade patterns. apparent as the European Union has become the country’s Labor-intensive manufacturing is moving out of China, main trading partner. US dollar fluctuations significantly which will open up opportunities for other developing impact the external sector, which employs around 16 countries, including Cambodia. However, the new countries percent of all Cambodian workers. The US dollar’s recent participating in GVCs have vast and rapidly growing labor appreciation vis-à-vis the euro and other currencies forces in industries where Cambodia currently holds a resulted in a decline in Cambodian garment exports to the comparative advantage, thus challenging Cambodia’s EU (Figure 24). It has also reduced the tourist trade because position.13 Also, digitalization may reduce the advantages it has made trips to Cambodia more expensive for non- of producing GVC goods in economies with low labor costs American tourists. This has negatively affected the pace and may reorient global production and trade back towards of job creation in these sectors, as well as the prospects sources of demand. At the same time, production may of creating jobs in Cambodia’s emerging manufacturing become increasingly concentrated in regional or local hubs clusters. Dollarization has also been fueling flows of capital closer to end markets, thereby strengthening regional rather and credit into the non-tradable sector, with the recent than global value chains. Outward FDI from Asian investors increase in capital formation being driven by investments (particularly from China) into other developing countries in construction rather than machinery and equipment. This has become a much more significant share of global puts Cambodia’s macroeconomic stability (and jobs) at FDI, suggesting that this could be a source of new FDI to risk, especially in the absence of an independent monetary diversify Cambodia’s exports. The emergence of these new policy. Asian investors is happening at the same time as Cambodia faces the threat of the loss of the tariff preferences that it currently enjoys from the EU in the short term and the US Mega-trends may catalyze the economy’s in the medium term. These trends will shape Cambodia’s move to Stage II and better jobs future participation in GVCs, which is a core feature of its export-oriented growth strategy. Emerging external forces can alter Cambodia’s jobs picture in the future. These mega-trends can Third, automation has the potential to create more, erode Cambodia’s investment position and threaten FDI- better, and more inclusive jobs—but also to make related and domestic jobs, but they could also provide an others disappear. Production processes in industries opportunity for Cambodia to move into Stage II of global that have been a standard phase of the global integration integration characterized by higher value-added investment process—such as automobile production—have become and jobs. Four mega-trends are particularly relevant in the heavily automated, thereby displacing labor. However, Cambodia context. technology is creating better jobs in other industries. Machines are improving production processes, such as the First, changing consumption patterns resulting from pattern cutting technology in the apparel sector or improved higher urbanization and a growing consumer class food processing facilities that better meet international within Cambodia and Asia will shift the composition food safety norms. The creation of machines in the rapidly of domestic demand and export demand. By 2030, growing electronics industry is a new source of better jobs more than 90 percent of developing Asian households are as well. Mobile phone technology and the internet are expected to have enough income to allow for discretionary unlocking new markets and efficiency-saving tools for small consumption, meaning that they can cover their basic needs producers, even among household enterprises and family and still have some money left over. Urbanization means farmers. While technology will replace low-skilled, routine that households will buy food and services that in the past jobs in the future, this is still a long way off in the industries they may have produced themselves. They will also spend that the government hopes to nurture, since these machines a higher share of their income on services rather than on do not yet exist, are not cost-effective, or are not sufficiently food or other basic necessities. This has two implications for flexible (Box 5). Machines will eliminate some jobs, but the Cambodian jobs. First, domestic demand will shift toward greater change will likely be that the tasks carried out within more, different, and higher-value goods and services jobs will become more sophisticated, thus requiring workers than in the past. Second, regional trade patterns will shift to have higher-level skills and a broader range of skills. to accommodate wealthier and more urban East Asian 13 For example, Myanmar in East Asia Pacific is attracting new FDI in the garment sector, and Ethiopia is also starting to expand its manufacturing assembly activities. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 30 MAIN REPORT Box 5: The Rise of the Sewbots? Maybe Not Quite Yet… Recent publications have estimated that East Asia’s garment jobs will be wiped out by machines in the next 15 years. This is certainly a frightening prospect, given that this USD 5 billion industry is the source of 80 percent of Myanmar’s exports (2015) and of more than 850,000 jobs. However, a closer look at the apparel industry suggests that these predictions of job losses may be excessive, especially in the short run. The jobs that cannot be automated—the production of specialized apparel and knowledge tasks that are higher up the value chain—will still exist. Also, a host of new jobs will be created, for example, in running and repairing the machines, programming machines to accommodate new styles, and designing shop floors to be machine-friendly. Several factors need to come together for machines to begin replacing humans, none of which are yet occurring in the apparel industry: 1. The existence of machines to replace labor. While technology is being employed in some parts of the apparel GVC, there is still no machine that can replace the cut-make-trim (CMT) process that employs 70 percent of garment workers as sewing machine operators. While the first CMT machine is expected on the market in 2019, it can only produce the most basic garment, an 8-step tee-shirt quite distant from the 78-step dress. 2. Repetitive tasks with few changes. Fashion changes quickly. While people can easily learn to stitch a new angle, stretch a new fabric, or add a new adornment, machines will not have that flexibility for many years. 3. High labor costs relative to the cost of machinery. Although labor costs are increasing in Vietnamese garment factories, they are still low compared to the cost of machines. While the CMT machine for tee-shirts is estimated to be able to pay for itself within two years (of displaced worker wages), the machine itself will need to be replaced frequently as fashion changes. Sources: ILO (2016), Frederick (2017), http://softwearautomation.com/ Fourth, Cambodia is a young country in an aging jobs is to move to Stage II of global integration, which will region, which means that new and better job involve attracting higher-value FDI, supporting links between opportunities are likely to be increasingly available exporting firms and input-supplying firms, and upgrading in neighboring countries with shrinking labor forces. worker skills. Doing so will require policymakers to adopt The size of the labor force has peaked in most of Cambodia’s policies designed to attract higher-quality foreign investment neighbors such as Thailand, Vietnam, and China. Wealthier and to prepare Cambodia’s workers and domestically-owned countries, such as Singapore and Japan, have already businesses to leverage better jobs from this investment. moved beyond their peak and are now suffering from labor This will only be effective if Cambodia focuses on building shortages. This is an opportunity for Cambodian workers competitiveness at home by instituting policy reforms in the to find jobs in countries that pay higher wages and may short and medium term aimed at creating more, better, and require higher skills. This could be beneficial to Cambodia if more inclusive jobs. it puts in place mechanisms to attract these workers back to Cambodia after they have increased their skills. Seven sets of policies can help firms, workers, and foreign investors to overcome the constraints that are preventing the creation of higher-value FDI jobs and Policy for a Jobs Future Consistent of FDI spillovers into jobs in the domestic economy. The analytical analysis underpinning this report identified the with Cambodia’s Vision 2050 key challenges to upgrading Cambodia’s jobs and also areas where policy intervention is needed. We selected policies to While current trends predict a somewhat sluggish jobs overcome these challenges based on existing analytical work picture, emerging mega-trends present Cambodia within Cambodia as well as other countries’ experiences in with new and better job opportunities provided that overcoming similar challenges. These policies are designed to policies are put in place to take advantage of those complement sectoral policies and were chosen because each trends. This report proposes a two-pronged strategy for meet the criteria of being impactful, feasible, sustainable, creating better jobs in Cambodia: (i) getting more out of and measurable. Moreover, these policies overlap with FDI and (ii) aligning the domestic agenda with jobs goals. all four rectangles in Phase IV of the Rectangular Strategy These are inter-related. The key to upgrading Cambodia’s as well as with the “environment” and “core” policies. The CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 31 MAIN REPORT Figure 25: Seven Policies for More, Better, and More Inclusive Jobs in Cambodia Seven Policies for More and Better Jobs Domestic Economy Export Sector Enhance Skills Development Boost HHE Productivity Strengthen Linkages Between Diversify Into Higher Exporters and Domestic Firms Value Added Exports Support SME Expansion Ensure Efficient Labor Mobility Macroeconomic Stability matrix in Annex I maps the policy options in this document technological transfers. These incentives will help firms to those in Phase IV of the Rectangular Strategy and also upgrade their production processes, thereby increasing identifies the government agencies that could take the lead investment in the domestic economy and increasing in each policy area. The successful implementation of these labor productivity. proposed policies will also require strong coordination across • Reviewing and streamlining customs requirements and government. the clearance process for export and import licenses. This will help to save time and reduce costs for traders, 1. Diversify Exports and FDI into Higher thus making Cambodia’s exports more competitive in Value-added Value Chains (or Segments global markets. of Value Chains) • Signing, finalizing, and enforcing international trade and investment agreements with Cambodia’s key trade partners Diversifying Cambodia’s export basket to include more to diversify across destinations as well as products. higher-value activities could attract more productive Securing preferential market access will help this. jobs that pay higher wages. In order to encourage the creation of better jobs, policymakers will need to focus on In the medium term: policies to attract jobs-friendly FDI (from global or emerging • Introducing super tax deductions for R&D and staff regional markets) and to move the economy into higher training to incentivize firms to undertake these value-added value chains (or segments of value chains), activities. These investments will not only yield returns including services for export. Specifically, they will need for investors, but they are also expected to generate to reduce the costs of imports and exports, which can be spillovers to the domestic economy through knowledge done in several ways, including: (i) modernizing procedures and technological transfers. in trade facilitation; (ii) developing logistics infrastructure; (iii) simplifying border processes; (iv) providing new types of • Automating the process of sanitary and phytosanitary incentives that target specific investments; and (v) creating certification while fostering more use of IT. By meeting quality assurance facilities. Policymakers also need to global certification standards, Cambodia will not only explore ways to maintain Cambodia’s preferential access to ensure the high quality of agricultural goods but will also key markets for its new labor-intensive exports as the end- support agricultural exports to feed expanding regional dates of the US and European preferential access treaties and urban populations. draw nearer. New analytical work is needed to identify the In the short run, the following policy directions should bottlenecks to expanding Cambodia’s export and FDI be prioritized: base. This could include exploring models for economic diversification from the point of view of trade diversification • Shifting away from tax holidays towards streamlined and GVC participation, including in the garments and incentives aimed at attracting private investment in tourism sectors (Box 6). It will be particularly important to machinery, such as tax credits on capital investment and identify the current workforce constraints and skills needed CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 32 MAIN REPORT Box 6: Policies to Move Up the Value Chain in Cambodia’s Tourism Sector Although the tourism sector in Cambodia generates good jobs and has signi cant spillover effects on and links to the domestic economy, its jobs potential is not being fully realized. The sector generates jobs and opportunities along its value chain, including in the primary sector, where most of the Cambodia’s poor are engaged (World Bank 2017a). Tourism can be a way to develop jobs in regions where opportunities for industrial development are often limited. However, in spite of Cambodia being home to some of the more archeologically valuable sites in the world, its tourism sector is generally low-value and with weak or only informal links to the domestic economy. While it creates many jobs, they are of a lower quality and are less inclusive than the tourist sector has the potential to create. The World Bank has identi ed the following recommendations for supporting the continued development of Cambodia’s tourism sector (see World Bank 2017a): • Improve the infrastructure and connectivity within Cambodia. Growing urbanization and tourism mean that the country needs to have better infrastructure and transportation in place to accommodate the needs of locals and tourists, curb potential traffic issues, and build resilience of the sector. • Develop new tourism markets, products, and services. For example, policymakers could look into encouraging the development of specific segments of the tourism value chains, including protected area tourism, domestic tourism, and business and events tourism. It will also be important to improve management of these tourism destinations if these markets are to be tapped. • Help producers and providers of food, crafts, and other local goods and services to access tourism value chains. This might include supporting enterprises to make Cambodian-made products that meet market demand or establishing associations among farmers and food processors to supply domestically produced foods to hotels. This would help to increase the overall benefit of tourism to featured destinations. • Expand and upgrade the skills of local workers, while strengthening public-private partnerships to provide tourism-related training. This might include fostering public-private partnerships between Government and training providers to provide and increase access to quality training for youth and women from poor communities to acquire the relevant skills and knowledge for the tourism industry, thus maximizing their potential employability. Greater collaboration among local workers, farmers, small and medium-sized enterprises, and tourism-related associations will also help expand and upgrade skills. in the future since these investments take time to mature. 2. Streamline Procedures and Reduce the Any policies aimed at fostering Cambodia’s transition into Costs of Establishing and Expanding SMEs GVCs such as garments and hospitality, which tend to be important for female employment, should also support Firm sales are generally required to grow for firms inclusive jobs. to hire new workers. This points to a set of policies that are directed toward enhancing firm profitability, which is The policies that we identified for diversifying then expected to have spillovers on job creation. A range exports and FDI into higher value-added value of policies can support the creation of new firms and chains correspond to the Overarching Environment their expansion. Four sets of policies that are particularly within Phase IV of the Rectangular Strategy. The main important for creating more jobs and better jobs, in terms of implementing agencies would be the Ministry of Economy reduced labor turnover, are identified. and Finance, the Council for the Development of Cambodia, the Ministry of Commerce, the Ministry of Agriculture, First, reduce the cost of doing business for domestic Forestry and Fisheries, and the General Department of firms. The policies from the Cambodia Investment Climate Agriculture. Assessment Report that are particularly important for job growth include: CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 33 MAIN REPORT • Reducing business registration costs and simplify Fourth, increase the ability of domestic firms to hire procedures by: (i) reviewing and reducing the fees for and retain workers by: starting a business and consider implementing a flat fee • Developing and strengthening intermediation that reflects the cost of service and (ii) introducing a mechanisms (job matching platforms and the National single platform for business registration by integrating Employment Agency, see below); and the incorporation process with registration at the MoC, General Department of Taxation (GDT) and Ministry of • Subsidizing some of the basic benefits (such as health Labor (MoL); care coverage and a retirement pension) that are usually provided to workers by their employers. This could be • Enhancing the quality of land administration by finalizing accompanied by an information campaign educating the issuing of land titles in the country and developing domestic firms about the importance of providing these an integrated online registry system for land, including benefits to workers and increasing worker awareness of ownership and cadaster information; their legal rights. • Improving commercial dispute resolution by reviewing the existing case management system at the courts The policies that we identified to streamline business and considering the development of an electronic case procedures and reduce the costs of establishing and management system for judges and lawyers; and expanding SMEs correspond Rectangle III (Private Sector and Job Development) Side 2 (Promoting • Facilitating the implementation of the insolvency legal SMEs and Entrepreneurship) within Phase IV of the framework by establishing the insolvency administration Rectangular Strategy. The main implementing agencies profession and improving the capacity of the public and would be the Ministry of Economy and Finance, the Ministry private sector related to insolvency matters. of Industry and Handicrafts, the Ministry of Commerce, and the Ministry of Labor and Vocational Training. Second, develop an ecosystem for domestic firms to increase business skills and knowledge. To deepen Phnom Penh’s nascent ecosystem and broaden it to the rest 3. Support Household Enterprises to of the country, the government should prioritize: Enhance Their Productivity • Instituting formal processes to encourage public and private dialogue (PPD) for the private sector to raise their Not only are household enterprises a significant concerns and discuss possible solutions; and source of job creation—a phenomenon that is likely to increase with urbanization—they also employ • Providing more public support to entrepreneurship and many vulnerable workers. Since only 6 percent of innovation structures by supporting structures including household enterprises hire workers from outside the incubators and research institutes. Funding to these household, policies aimed at fostering the growth of structures could be made conditional upon results. household enterprises should focus on upgrading job quality (productivity or incomes) rather than expanding the Third, increase access to finance through a grant number of jobs that they provide. As older workers are more program and fiscal incentives. This includes: likely than younger workers to be employed in household • Financing a Jobs Fund to support different segments enterprises, improving job quality would increase the of firms with high job potential through technical inclusivity of Cambodia’s jobs, since older workers tend to assistance and matching grants for three windows: (a) have lower participation in good jobs than young workers. the consolidation of fragmented activities/small-sized While little is known about the nature of these jobs—which firms so that they can compete in national (and possibly indicates an urgent need for more research—we have international) markets (such as agro-processing firms); developed some policy recommendations based on the (b) increased support to potential domestic suppliers of analysis in this report, recent data analysis of household existing and nascent FDI-dominated value chains, such enterprises in Vietnam (Pasquier-Doumer et al. 2017), as apparel and electronics; and (c) domestic investment and lessons from policy interventions in other countries projects with a high potential for job creation; and designed to support household enterprises. • In a more long-term approach, considering lowering First, more research must be completed to understand the size of the investment determining the eligibility the nature of household enterprises in Cambodia and of domestic firms for fiscal incentives, as these how to best support them. Only a few countries have requirements are a potential barrier to entry for SMEs. collected data on household enterprises, and these data CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 34 MAIN REPORT have revealed that these enterprises have very different had full information across all locations. IT can overcome motivations, aspirations, and challenges than do those of this problem by aggregating demand from rural and remote firms that are driven by a profit motive and that are not an areas and make it worthwhile for large suppliers, or other extension of the household. Since the number of household intermediaries, to engage productively with small-scale enterprises is likely to grow as Cambodia urbanizes and household enterprises. becomes wealthier, it is crucial to understand this sector better, To assist household enterprises in accessing markets, policymakers can: Second, it will be important to “professionalize” • Support the development and use of IT solutions to household enterprise owners so that they have the improve the business and management practices of tools to run their enterprises as a business rather low-skilled, small-scale producers. Some household than as an offshoot of their households. enterprises in Cambodia are already using technology, such as PassApp or Facebook, to reach new customers. In the short run, policymakers can: Targeted apps to reach customers and new apps for • Provide training in basic accounting and marketing business management are already being used in other practices to household enterprises to help them make countries. However, the evidence of their impact on sound financial decisions and expand their production. business and management practices is still weak. While experience in other countries has shown that • Expand ICT infrastructure to ensure nationwide access. such training programs improve business practices, the evidence is weaker about their effect on profitability, The policies that we identified to help household probably because of the short duration of such programs enterprises to enhance their productivity correspond in other countries. to Sides 1 and 3 of Rectangle II (Economic • Match younger firms with more established firms that Diversification) within Phase IV of the Rectangular can mentor them and help them to upgrade their skills. A Strategy. The main implementing agencies would be the study of how mentoring affected Kenyan microenterprises Ministry of Posts and Telecommunications and the Ministry showed that participating enterprises saw their profits of Commerce. increase (Brooks et al. 2016). Other mentoring programs have successfully been implemented in the United States and India. 4. Support the Development of Links between FDI Firms and Domestic In the medium term, the government might consider: Input-supplying Firms • Creating a one-stop online shop to provide household Strengthening links between exporting FDI firms enterprises with information and technical assistance, and domestic SMEs can be a new way to foster SME including basic training programs. This would reduce expansion, technology transfer, and the creation of the transaction costs involved business upgrading and indirect export jobs. Cambodian exporters source very create a virtual community of household enterprises. few of their inputs locally. Experience in other countries, Third, policymakers should foster the use of IT such as Thailand, Malaysia, and China, has shown that solutions to expand household enterprises’ access to these backward links can be a rich source of new good jobs. markets. Many household enterprises rely on their personal However, these connections often do not emerge network to supply inputs. Data from Vietnam showed that naturally. Most of Cambodia’s domestic producers do more than 80 percent of household enterprise inputs were not meet the quality standards and/or productivity levels purchased from other household enterprises (Pasquier- to qualify to supply FDI exporters. In surveys, FDI firms Doumer et al. 2017). This can be a significant barrier have cited a lack of industry-ready suppliers and of both to efficient operations, particularly in rural and remote technical and soft skills as the main barriers to buying areas where there are fewer and more limited informal from domestic input producers in Cambodia (World Bank networks available. To use the hypothetical example of a 2018). Therefore, foreign investors do not actively seek out retail shop, large wholesalers in cities find it very costly to domestic suppliers. Also, the absorptive capacity of these collect information about demand from retail shops in rural local suppliers is weak, so they do not benefit from GVC villages and similarly the owners of these village shops find spillovers in knowledge and technology. it costly to travel to the cities to purchase limited amount of goods that they need for their small shops. So, they The right policies can help to build links between each buy from and sell to those closest to them, usually exporting firms and domestic input-supplying firms. at higher prices and for goods of lower quality than if they These policies include: CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 35 MAIN REPORT • Developing a database or directory of potential suppliers throughout their working lives to keep pace with evolving that have adequate technology and capacity to partner technology and the knowledge economy. Building this skills with multinational FDI firms to overcome information development system is such a massive undertaking—as failures; highlighted in the government’s Education Strategic Plan 2014-2018 and the TVET Strategy: 2016-2021—that • Establishing local supplier development programs to in this report we only discuss the policies for making the help domestic enterprises become qualified suppliers or education and training system more responsive to the labor subcontractors for FDI firms; market. • Simplifying and improving the administration of VAT reimbursement to ensure that exporting firms can We have identified seven priority policy priorities: receive refunds in a timely manner; • Incorporate digital literacy, socio-behavioral skills • Requiring the Cambodia Investment Board to find (creativity, innovation, interpersonal, teamwork, out from existing investors: (i) what constraints and and leadership), and higher-order cognitive skills challenges they face in sourcing their inputs locally; (ii) (mathematics, logic, critical thinking, complex problem what their future investment and expansion plans are; solving, reasoning) into the school curriculum with and (iii) whether and how they would benefit from the cumulative learning throughout a student’s primary relocation of international suppliers to Cambodia (World and secondary school career. Experiences in a range Bank 2018); and of countries have shown the viability of teaching these additional skills in the classroom without imposing • Strengthening the domestic absorptive capacity of the undue burdens on instructors.14 local private sector and workforce while supporting and promoting entrepreneurship and SMEs as well as • Expand innovative models for increasing secondary workforce development (these policies are discussed school completion rates, such as the bridge program, elsewhere but are relevant here). access to computer-aided learning, and incentives to encourage households to invest in schooling. The policies that we identified for strengthening links • Provide incentives for women to continue in secondary between FDI firms and domestic input-supplying and post-secondary education, particularly in the STEM firms correspond to Sides 2 and 4 of Rectangle III fields. Data show that women attaining higher levels (the Promotion of Private Sector Development and of education and employed in specific sectors and Employment) as well as the Overarching Environment occupations are key to reducing the gender wage gap of Phase IV of the Rectangular Strategy. The main and expanding employment options for women. implementing agencies would be the Ministry of Economy and Finance, the Council for the Development of Cambodia, • Introduce results-based financing (RBF) for TVET the Ministry of Commerce, and the Ministry of Industry and institutions with good results being defined as the Handicrafts. successful integration of students in the job market, as well as expanding the provision of short courses (those that are short and flexible and that teach practical skills 5. Build a Skills Development System that in high demand) to serve the working adult population. will Attract Higher-value FDI and Increase • Incentivize the enterprise sector to play a larger and more Productivity across the Economy structured role in providing, guiding, and advocating for Cambodia’s lack of a strong skills development a demand-driven skills development system. This would system presents policymakers with a chance to build involve: (i) co-funding skills development programs in a system geared towards 21st century jobs that will partnership with the enterprise sector with the financing increase the skills level of the workforce, the returns being contingent on graduation, job placement, or job to education, and productivity levels throughout the promotion rates; (ii) subsidizing infrastructure and economy. There are two elements to building such a system. technology for training centers within special economic First, the education system needs to provide students with a zones (SEZs) to take advantage of economies of scale strong foundation in a range of knowledge, behavioral, and (similar to the Penang Institute in Malaysia); and (iii) digital literacy skills. Second, the technical and vocational developing incentive mechanisms to systematize the training (TVET) system should be agile, flexible, and market- dialogue and cooperation between employers and skills responsive so that workers can regularly upgrade their skills program providers. Additionally, creating a standardized 14 See Cunningham et al. (2016) and Guerra et al. (2014) for a review of methods for teaching socio-behavioral skills in pre-school, primary, secondary, and post-secondary schools. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 36 MAIN REPORT testing and certification framework for skills, combined programs to populations that tend to use informal job with incentives based on results, can encourage private search mechanisms, and expanding the information used providers of skills training to play an active role. by and the role of job counselors to guide jobseekers in the job search process; and • Collect and disseminate user-friendly information to students, jobseekers, education and training institutes, • Investing in hardware and software for the labor market and employers to enable them to make skills development information system managed by the NEA. choices that are aligned with market demand; this will require collecting, analyzing, and disseminating A more detailed analysis on the scope and impact information on emerging jobs and associated wages, of labor migration requires data that Cambodia the skills that are in greatest demand, and the quality does not currently possess. This is especially the case of skills development programs as measured by job since most of Cambodia’s migration is informal and thus placement rates. not systematically recorded and compiled. Migration is an important component of Cambodia’s jobs picture, as Additional analytical work is urgently needed, as migration is common within Cambodia just as Cambodia well. First, carrying out a systems assessment will give is the source of 12 percent of all intra-ASEAN migration the Ministry of Labor and Vocational Training the tools to (Testaverde et al. 2017). Better data about migration trends prioritize the long list of policy reforms, identify international can be collected in two ways: best practices that could be considered in the design of • Revise the census and existing household surveys the proposed skills development system, and set a baseline (CSIS, Labor Force Survey) to include questions about and an M&E system to monitor the effectiveness of reforms. migrant household members, who typically are absent In addition, future analytical work will need to be done to from the household roster. Special questions can be assess employer-driven training programs in Cambodia and added on how these members interact with the current elsewhere in the world. household in ways beyond remittances. This information can be used to create an absentee/migrant roster that The policies that we identified for implementing a aggregates information on the reasons for migration, skills development system that will attract higher- their current location, demographics, labor supply, and value FDI and increase productivity across the remittances. This in turn would be extremely valuable economy correspond to Sides 1 and 2 of Rectangle I for analyzing the scale and patterns of domestic and (Human Development) as well as Side 1 of Rectangle international migration. III (the Promotion of Private Sector Development and Employment) within Phase IV of the Rectangular • Use specially dedicated migration surveys (or modules Strategy. The main implementing agencies would be the in general-purpose surveys) to gather more detailed Ministry of Labor and Vocational Training and the Ministry of information about the dynamics of different forms Education, Youth, and Sports. of migration. Beyond the information on the broader migration trends that can be captured through a census, it is important to collect information about 6. Promote Efficient Labor Mobility and Job migrants who move temporarily, seasonally, change Matching destinations, engage in repeat migration to the same or different destinations, or who change the purpose To enhance the allocative efficiency of labor, workers of migration. These dynamics can be captured using need information and support to find and access the survey instruments that require their own methodology. best possible jobs for their skill sets. In Cambodia, This is valuable for helping policymakers form policies workers usually find jobs through personal contacts, whether that maximize the gains from all forms of migration. the job is in their locality or in another country. While this is a common practice, if workers have access to information To support more meaningful job searches and safer about job vacancies, occupations, and skill needs, they can international migration and to safeguard the human then find more appropriate jobs, especially if they are also rights of migrants, the Cambodian government provided with support in applying for those jobs. should continue its negotiation of bilateral migration agreements. However, given that most migrants do not use Policymakers can enhance job matching in Cambodia these formal channels, the government could also: by: • Link Cambodia’s labor market information system to the • Expanding and deepening the operations of the National labor market information systems in countries offering Employment Agency (NEA) to collect more and more better jobs; and timely data on job vacancies, developing outreach CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 37 MAIN REPORT • Support pre-departure training services for workers and capital stock accumulation to sustain high economic searching for work abroad, online resources for potential growth. It will also help the corporate sector to access or actual migrants, and incentives and processes to sources of long-term funding and establish alternatives facilitate the repatriation and re-integration of these to investing in construction and real estate to mitigate workers into Cambodia’s labor market. some of the current macro-financial risks. • Strengthen the public Investment management The proposed policies are aligned with side 1 of framework to foster capital formation and introduce Rectangle III (Private Sector and Job Development). investment tax credits for the acquisition of machinery The key actions focus on “providing work orientation training and equipment. and expanding job recruitment and advertising services; as well as streamlining labor market information both inside The policies that we identified for macroeconomic and outside the country in order to increase employment and exchange rate management correspond to opportunity in an equitable manner and reduce risky work the Overarching Environment of Phase IV of the migration.” It also aims to strengthen the governance of Rectangular Strategy. The main implementing agencies migrants’ work, with the aim of improving the quality jobs would be the National Bank of Cambodia and the Ministry of and migration experiences, as well as to support returning Economy and Finance. migrant workers to invest in their home communities. Perhaps the biggest challenge for the implementation 7. Regain Macroeconomic Independence and of these policy areas is in coordinating the reforms Exchange Rate Flexibility across the government, yet these proposed policies must be coordinated to ensure that they collectively Cambodia should take steps to regain exchange result in the creation of more, better, and more rate flexibility and monetary policy independence inclusive jobs. The fact that the policies presented in this to shield jobs from fluctuations in the US dollar and report cut across all aspects of Phase IV of the Rectangular other macroeconomic risks. Cambodian policymakers Strategy demonstrates the complexity of the jobs agenda could consider developing a market-based de-dollarization while highlighting the risk that some crucial jobs policies strategy to progressively regain policy autonomy. The might not be implemented or be implemented in a development of a domestic bond market would also help coordinated manner. to both foster domestic savings and progressively increase exchange rate flexibility to support job creation going To ensure that these agency-specific actions are forward. Policymakers also need to encourage private sufficiently coordinated, the government can investment and credits to invest in the tradable sector undertake two processes. First, policymakers could instead of construction and real estate, sectors that are mobilize stakeholder support for a Jobs Strategy. This prone to instability and have fewer good job opportunities Strategy would: (i) identify the strategic jobs goals that are than the exporting sector does. yet not defined in Phase IV of the “Rectangular Strategy; (ii) specify those sectoral policies from the Rectangular Strategy This points to a range of macroeconomic and that are also crucial for creating more, better, and more fiscal policies to support job-creating industries. inclusive jobs; and (iii) set up a system for monitoring jobs- Policymakers can: specific policy actions across the many different ministries, agencies, and other stakeholders involved in implementing • Institute a campaign to publicly recognize private sector the strategy. Second, they could appoint a Jobs Champion institutions that pay salaries in Khmer riel— a short- with the leadership skills to oversee the reform across the term action that would support the use of local currency. entire government. As noted in Phase IV of the Rectangular • Adopt and gradually implement a larger market-based Strategy, inter-institutional or ministerial coordination is de-dollarization strategy by: (i) gradually increasing an important key to the successful implementation of the reserve requirements for deposits in dollars and (ii) Rectangular Strategy and will be similarly crucial to the bringing down the riel benchmark interest rates to successful implementation of the Jobs Strategy. This can promote borrowing in the national currency. be achieved by creating a coordinating body that will both guide and hold accountable all government and private • Develop a domestic debt market (both public and private) sector actors involved in the drive to create more, better, and starting to issue sovereign debt to mobilize domestic and more inclusive jobs for Cambodia’s future growth and and foreign savings. This will help increase investment prosperity. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 38 MAIN REPORT Box 7: Policy Implications for Inclusive Jobs The report proposes analysis and policy recommendations for better and inclusive jobs. Indeed, “inclusiveness” is streamlined through the policy recommendations. However, it is useful to explicitly identify how these jobs may improve the inclusiveness of future jobs. First, diversifying the export and FDI sector will benefit women and young workers. Women are the employee of choice in FDI and exporting firms today (Policy Area #1). Countries with more diversified exports and FDI-sectors also see a high share of women working in industries related to electronics, food processing, and service exports. However, for Policy Area #1 to truly work for women, the government can make particular efforts to attract the kinds of exporting industries that tend to employ women. Further, these workers tend to be young, so this policy will provide new jobs for young workers. Support to improving the productivity of household enterprises (Policy Area #3) will disproportionately benefit the poor, women, and older workers. Productivity enhancing mechanisms that can be easily accessed from home, such through technology, will be particularly beneficial to women, who tend to need to combine home and work duties, and to people with disabilities that are mobility constrained. Further, efforts to link domestic (including household) enterprises with FDI (Policy Area #4) can benefit these small producers. While a skills development system will benefit everyone (Policy Area #5), women, older workers, and the poor will particularly gain. Women still have lower levels of education than their male counterparts, so there is a basic need to level the playing field across genders. The expansion and enhanced quality (measured as relevance) of TVET services will be crucial since the majority of today’s workforce does not have the skills needed today, let alone in the future. At the same time, younger workers will need to develop a broad set of skills to lead Cambodia into Industrial Revolution 4.0. Young people, the unemployed, and those trying to climb the career ladder will benefit from an expanded labor market information system and an even stronger National Employment Service (Policy Area #6). These services will permit them to better prepare for and find the best jobs for their skills and interests. On a related note, improved information and processes for migration may provide better work experiences for young men and women (who tend to migrate) and may draw them home again. Finally, Policy Area #7 on macroeconomic independence and exchange rate flexibility will be particularly beneficial to young women, who are over-represented in export-oriented jobs. Additional actions can be undertaken to support women, youth, older, low-skilled, and rural workers. These additional policies should co-exist with the seven policy areas defined in this report to meet the goal of more inclusive jobs. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 39 MAIN REPORT A Vision of Cambodia’s Future Jobs The number of knowledge-intensive jobs will continue to grow, while the number of subsistence jobs will Based on current trends in Cambodia’s economy, the gradually decrease. Cambodia is already moving in this emerging mega-trends, and the successful implementation direction. However, these policy reforms will speed up the of the proposed policies, we can predict the sources transformation. Cambodian policymakers need to increase and nature of Cambodia’s future jobs that will provide better jobs either by attracting higher value-added FDI or by firms and workers with even greater benefits than those encouraging the creation of firms that are knowledgeable and enjoyed today. skillful enough to recognize new competitive opportunities. The export sector will generate more higher-value jobs There will be more jobs that require the use of ICT. both in its own factories and in new domestic SMEs Technology will continue to be a source of entrepreneurship that will supply those FDI firms. Garment manufacturing and of better jobs. The automation of tasks will also mean is likely to decline over the next decade as a result of mega- greater use of ICT in production. For example, entrepreneurs trends, the potential loss of the tariff preferences currently who create technology will be the generators of knowledge- offered by the EU and the US, and Cambodia’s aspirations intensive jobs. Household enterprise owners who use ICT to move into Stage II of global integration. If Cambodia is in their business and management practices will increase successful in diversifying and expanding into higher value their productivity. Technology can also be used to advertise FDI and in creating links with domestic producers, more current and future available jobs, to open access to markets, good jobs will emerge that will particularly benefit women and to learn new skills. For example, one-stop virtual shops (working in FDI firms and in tourism) and younger workers. can be used to enable workers to receive training to prepare them for the jobs of the future. IT solutions that aggregate Household enterprises and SMEs will grow, be products and/or suppliers, facilitate e-commerce, and more profitable, and be more integrated into the reach new customers can widen market access, especially economy as a whole. These are already the source of for rural firms seeking to reach urban markets, and create most good jobs in the Cambodian economy. If the rising jobs in the process. Nonetheless, some jobs may also be consumer class materializes as expected and if links can lost due to automation. Therefore, it will be important for be developed between SMEs and the FDI firms, the number, policymaker to understand which types of technology will size, productivity, and wages of SMEs are likely to increase complement labor-intensive, high value-added tasks and as well. This is likely to mostly benefit young workers as which will replace labor in certain occupations. they have a higher propensity than other age groups to work in these kinds of jobs. In closing, Cambodia is at a turning point. It can continue its current development and jobs strategy, Labor productivity and wages will increase. If Cambodia making policy changes at the margin and continuing a can successfully upgrade the skills of its existing labor slow upward movement in jobs quality. Alternatively, it can force through intensive, short-term, and market-oriented take on bold, more aggressive policy reforms and move skills development, while simultaneously strengthening to a higher equilibrium of good jobs that are particularly the education system to shape the workers of the future, inclusive of women and those working in the traditional then labor productivity, innovation, and wages will increase. sectors. This report argues that greater gains are possible When Cambodia’s workforce has more skills, this will attract through a deliberate Jobs Strategy that focuses on our six FDI in higher value-added segments of existing GVCs and policy reform areas, together with leadership by a strong in new value chains. Productivity in the traditional sectors coordinating body and commitment across government to will also increase and will raise the earnings of those in create the jobs that will lead Cambodia toward its upper- subsistence household enterprises. middle income Vision for 2050. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 40 MAIN REPORT References Acemoglu, Daron, and David Autor. 2011. “Skills, tasks, and technologies: Implications for employment and earnings” in David Card and Orley Ashenfelter eds. Handbook of Labor Economics, Volume 4. Elsevier: 1043-1171. Beine, Michel, Frederic Docquier, and Hillel Rapoport. 2008. “Brain drain and human capital formation in developing countries: winners and losers.” The Economic Journal 118 (528): 631-652. Bloom, Nicholas, Benn Eifert, Aprajit Mahajan, David McKenzie, and John Roberts. 2013. “Does management matter? Evidence from India.” The Quarterly Journal of Economics 128(1): 1-51. 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CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 42 MAIN REPORT ANNEX1: Summary of Policy Recommendations Selected Policy Actions Corresponding Main Long-term Parts of Policy Areas Implementing Short term (within the Medium term Goals Rectangular Agencies new five-year plan) (by 2030) Strategy-Phase IV Diversify 1. Shift from tax holidays to 1. Introduce super tax Attract higher Overarching Ministry of exports and streamlined incentives that deductions for R&D value-added Environment Economy FDI into higher foster private investment in and staff training investment to and Finance, value-added machinery, such as a tax create better Council for the 2. Automate the value chains credit on capital investment jobs in new GVC Development process of sanitary (or segments of and technological transfers. sectors of Cambodia, and phytosanitary value chains) Ministry of 2. Review and streamline certification and Reduce the Commerce, Because most customs requirements and foster the adoption of transaction costs and Ministry of Cambodia’s clearances for export and more IT of importing and of Agriculture, current jobs are import licenses to reduce exporting while 3. Pursue trade Forestry and in low-value the time and costs of ensuring the high agreements with new Fisheries (General segments of trading across borders. quality of exports international partners Department of GVCs. to integrate into Agriculture) regional and GVCs Streamline 1. Reduce the cost Complete and Create a range Rectangle II Ministry of procedures and of doing business for approve the Law on of institutions (Economic Economy and reduce costs domestic firms and support Electronic Commerce that can assist Diversification) Finance, Ministry of establishing the development of an entrepreneurs of Industry and Side 1, Side 3 and expanding ecosystem for firms by: at the various Handicraft, SMEs (i) reducing business stages of the Ministry of registration costs and development of Commerce, Because rm simplifying procedures, an enterprise, Ministry of Labor start-ups are a (ii) improving dispute including and Vocational signi cant source resolution processes and ideation, Training of jobs and insolvency administration, incubation, could generate (iii) providing more public acceleration, and even more in support to entrepreneurship development. the future, but and innovation structures, rm growth including incubators, (in terms of tech hubs, and research adding workers) institutes; and (iv) starting a is seriously Jobs Fund to provide firms constrained. with technical assistance and matching grants; 2. Increase the ability of domestic firms to hire and retain workers by; (i) developing and strengthening intermediation mechanisms, and (ii) subsidizing some basic worker benefits. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 43 MAIN REPORT Selected Policy Actions Corresponding Main Long-term Parts of Policy Areas Implementing Short term (within the Medium term Goals Rectangular Agencies new five-year plan) (by 2030) Strategy-Phase IV Help household 1. Enhance access to 1. Open one-stop Increase the Rectangle Ministry of Posts enterprises to markets by encouraging the (virtual) shops productivity II – Economic and Telecommu- enhance their development of sustainable where household and incomes Diversification nications, Ministry productivity IT solutions that can enterprises can and improve of Commerce Side 1, Side 3 aggregate products and/ go for registration, the welfare Because nearly or suppliers, facilitate information, and of household one- fth of e-commerce, and help firms technical assistance enterprises. jobs are in this to reach new customers. including basic sector, which is training programs. likely to expand 2. Professionalize with growing household enterprises by: 2. Expand ICT urbanization. (i) matching younger firms infrastructure with more established firms nationwide. through mentoring and (ii) improving the business and management practices of low-skilled small-scale producers by providing them with IT solutions. Support the 1. Simplify and improve the 1. Develop a database Foster the Overarching Ministry of development of administration of the VAT of SMEs and suppliers integration of Environment Economy links between reimbursement system so to enable FDI firms SMEs into jobs- and Finance, Rectangle III - FDI firms and that importing firms can get to identify the right friendly GVCs Council for the Promotion of domestic refunds in a timely manner. suppliers with by becoming Development Private Sector input-supplying adequate technology indirect exporters of Cambodia, 2. Ask existing investors: Development and firms and capacity. Ministry of (i) what their constraints Employment Commerce, Because working and challenges are in local 2. Increase the Side 2, Side 4 and Ministry of with FDI rms sourcing; (ii) what their productivity of Industry and can help SMEs to future investment and indirect exporters, Handicrafts expand their jobs expansion plans are; and in particular SMEs, and pro ts, but (iii) how they might benefit by introducing these links need from the relocation of behavioral incentives to be fostered. international suppliers to to encourage FDI Cambodia. firms to invest in local workforce development, R&D, local sourcing, and supplier upgrading activities. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 44 MAIN REPORT Selected Policy Actions Corresponding Main Long-term Parts of Policy Areas Implementing Short term (within the Medium term Goals Rectangular Agencies new five-year plan) (by 2030) Strategy-Phase IV Build a skills 1. Expand innovative models 1. Incorporate digital Develop a Core (Governance) Ministry of Labor development for enabling students to literacy, socio- collaborative and Vocational Rectangle I - system that finish secondary school, behavioral skills (public- Training and Human will attract such as the bridge program (creativity, innovation, private) skills Ministry of Development higher-value and access to computer- interpersonal skills, development Education, Youth, FDI and aided learning, and give teamwork, and system that Side 1, Side 2 and Sports increase incentives to households to leadership) and prepares and Rectangle III - productivity invest in schooling. higher-order cognitive equips workers Promotion of across the skills (mathematics, for a competitive 2. Develop a plan for Private Sector economy logic, critical and constantly engaging the enterprise Development and thinking, complex changing jobs Because a sector in providing, Employment problem solving, and market. knowledge- guiding, and advocating reasoning) into the Side 1 based economy for a demand-driven skills Provide curriculum. requires an development system. information employer-driven, 2. Allocate public to students, 3. Provide incentives to results-oriented, resources to jobseekers, encourage women to and exible skills results-based education pursue secondary and development skills development and training post-secondary education, system. programs. institutes, and especially in the STEM employers to fields. enable them 4. Collect and disseminate to make skills user-friendly information development for students, jobseekers, choices that education and training are aligned with institutes, and employers market demand. to help them to make skills development choices that are aligned with market demand. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 45 MAIN REPORT Selected Policy Actions Corresponding Main Long-term Parts of Policy Areas Implementing Short term (within the Medium term Goals Rectangular Agencies new five-year plan) (by 2030) Strategy-Phase IV Promote 1. Expand and deepen the 1. Invest in hardware Increase Rectangle III - Ministry of Labor efficient labor NEA’s operations. and software to allocative Private Sector and Vocational mobility expand the NEA’s job efficiency by Development and Training 2. Revise the census and vacancy database. ensuring that Job Employment Because other relevant surveys to workers are well- Cambodia has better collect data about 2. Link Cambodia’s Side 1 matched to their a highly mobile migration trends. labor market jobs and can labor force that information 3. Support pre-departure acquire skills. is not nding the system with services for migrants best jobs to t those in countries going overseas to look their skills offering good job for work and sponsor a opportunities. website covering migration practices, rights, and resources. 4. Strengthen incentives and initiatives to repatriate skilled Cambodian migrants who are working abroad. Regain mac- 1. Promote the use of the 1. Develop, adopt, Regain exchange Overarching National Bank roeconomic local currency through and gradually rate flexibility and Environment of Cambodia independence a campaign to publicly implement a market- monetary policy and Ministry of and exchange recognize private sector based de-dollarization independence to Economy and rate flexibility institutions that pay salaries strategy by: (i) shield jobs from Finance in Khmer riel. gradually increasing factors affected Because reserve requirements by US dollar US dollar 2. Strengthen the public for deposits in dollars fluctuations. uctuations investment management and (ii) bringing down impact framework. the riel benchmark Cambodia’s interest rates to export sectors, promote borrowing in which employ a the national currency. large share of workers. 2. Consider developing a domestic debt market and start to issue sovereign debt. CAMBODIA’S FUTURE JOBS: LINKING TO THE ECONOMY OF TOMORROW 46 MAIN REPORT Cambodia Country Of ce Exchange Square Building Floor 10th 3RD and 11th IFC Streets 61-61 and streets 102-106 Sangkat Wat Phnom, Khsn Daun Penh Phnom Penh, Cambodia www.worldbank.org/cambodia