A critical barrier effecting sustainable growth in Cambodia is the lack of investment in human capital and education by the government. The main issue is that it has been overlooked due to fast increases in economic growth; there was a 7.3% growth rate in 2012 (The World Bank, 2013). However this growth is unequal and has only been focused within a few sectors of the economy, mainly in the capital Phnom Penh. Along with the “rapid expansion of the urban labour market” education has been left to deteriorate (UNDP Cambodia, 2011). In comparison to neighboring countries within the ASEAN Cambodia’s tertiary education is significantly far behind, “in 2007 the enrolment ratio in this sector was just 5%, compared to 12% in Lao PDR, 17% in Indonesia, and 28% in Philippines” (UNDP Cambodia, 2011). This supply side issue resulting from inefficient government spending has big implications on the demand side, attracting only low level jobs to the economy due to the low skilled workforce.
International companies who do wish to invest in Cambodia are further encouraging low skill and low pay, leading to an economy-wide low-production-quality trap occurring when there are O-ring effects “across firms as well as within firms” (Todaro & Smith, p.179, 2009). Kremer’s O Ring theory suggests local production bottlenecks have a multiplicative effect on other production; bottlenecks reduce workers’ incentive to invest in human capital as the return on their skills is lowered. This will further distort growth, the more industries moving towards O-ring reflects sources of growing inequality, therefore an industrial policy should be implemented by the government to encourage quality improvement in human capital in order to generate equal growth throughout the economy.
In order to for individuals to invest in their human skill capital there needs to a certain level of free education available to the public. In Cambodia only 30 years ago the majority of intellectuals were victims of the Khmer Rouge genocide along with many children, furthermore education was banned, there were no schools. Thus the attitude towards education in Cambodia, by the public and those in power, is very different to the way our society values education. The Lorenz curve for the distribution of education shows whether public spending on education is fairly utilised or only available to a specific class of people.
Furthermore the lack of investment in education and skill training will result in a middle income trap. Economic growth will begin to slow as the unskilled labour force is exhausted, fundamental policies regarding foreign direct investment (FDI) and capital will no longer improve further in line with labour, and the workforce will be unable to move into high quality jobs due to lack of human capital, this in turn limits and stifles economic growth.
Trade openness and FDI have further limitations on growth and development in Cambodia, this stems from a key weakness in the economy,...