Human Capital Implications of Future Economic Growth in Cambodia: Elements of a Suggested Roadmap

1. Human Capital Implications of Future Economic Growth in Cambodia: Elements of a Suggested Roadmap 16 February 2011 Report prepared for UNDP Cambodia by Strategic Asia

2. OUTLINE Cambodian Human Capital in Light of the Current Global Economic Crisis Economic Diversification and the Human Capital Roadmap Human Capital and State Capacity Building Investing in Human Capital in Cambodia Human Capital in Cambodia: Reasons for Optimism • Part 1: • Part 2: • Part 3: • Part 4: • Part 5: 1

3. CAMBODIAN HUMAN CAPITAL • Cambodia is in the midst of recovering from its most severe economic shock in two decades. • This revealed a number of key structural weaknesses in the Cambodian economy • Growth was concentrated in a few foreign direct investment-dependent industries • Concentrated in a few urban centres especially the capital Phnom Penh • Domestic private sector remains a collection of tiny family enterprises within the informal economy • Cambodia still remains a largely agrarian economy 2

4. CAMBODIAN HUMAN CAPITAL • While Cambodian primary education enrolment ratios have risen sharply over the last decade, this drops sharply in later stages of the educational cycle Gross Enrolment Ratio Primary Secondary Tertiary Comparison ASEAN countries • Comparative ratios in neighbouring ASEAN countries are substantially higher • In 2007 the enrolment ratio in this sector was just 5% compared to 12% in Lao, 17% for Indonesia, and 28% in Philippines Source: UNESCO Institute for Statistics 3

5. CAMBODIAN HUMAN CAPITAL • Rapid economic growth and expansion of the urban labour market has concealed underlying structural problems in education and skill formation Percentages of People Moving During Three Times Periods • Growth of GDP, combined with a demographic structure in which some 60% of the population is below 24, has generated high levels of internal migration • Migrant populations are more difficult to identify and redirect into formal secondary school programs • Sharp inter-regional differences in school attendance and quality only complicate this Source: E. Morris. 2007. Promoting Employment in Cambodia: Analysis and Options. ILO. P. 77 Projected Labour Force Growth in Cambodia 2007 – 2015 (%) 4 Source: Ministry of Labour and Vocational Training Royal Government of Cambodia.

6. CAMBODIAN HUMAN CAPITAL • The RGC has responded to these policy challenges by designing a comprehensive development strategy, the Rectangular Strategy • This strategy provides most of the key building blocks for future sustained recovery particularly because it seeks to integrate economic policy with human development 5

7. CAMBODIAN HUMAN CAPITAL • Cambodia continues to face a number of critical policy challenges • An important challenge facing policy makers is to work out how to link the short term priorities of employment generation and poverty alleviation with the longer term task of economic diversification, building a robust human capital base and strengthening government capacity to face future challenges of financial regulation, climate change mitigation and combating economic inequality 6

8. ECONOMIC DIVERSIFICATION • Current Approach • The government’s approach has been to maintain macroeconomic stability, restore the employability of its laid-off workers as well as to seek to restore FDI flows to Cambodia which were badly damaged during the global credit squeeze • These efforts reflect a partial approach to what is an economy-wide problem; the government needs to ensure the human capital base expands along with the economy’s diversification • As Cambodia goes forward it must create a human capital development programme able to deal with these challenges 7

9. ECONOMIC DIVERSIFICATION • Knowledge Economy • The urgency of creating a such a human capital development plan is also rooted in recent thinking on economic diversification strategies • There is a growing acceptance of the view that future growth and productivity will be driven by “knowledge products,” including the capacity of countries to emulate frontier technologies • Only a comprehensive approach to future human capital development, a Human Capital Roadmap, will allow Cambodia to prepare itself for the future development of its knowledge economy 7

10. ECONOMIC DIVERSIFICATION • Elements of a Human Capital Roadmap • Ensuring nationally defined minimum quality, access and participation rates in basic and secondary education • Adopting a life cycle approach to human capital development • Assessing human capital requirements not only of business but also of research and development, innovation network and business parks, and of capacity building requirements of government agencies • Careful integration and ordering of long term education and training targets and quality benchmarks with short term, non-formal education and work retooling • Balancing the contributions of mass expansion of secondary and higher education and the need to build specialised elite institutions • Producing a long term financing plan for public expenditure on human capital • Development of an institutional mechanism for coordinating and joint programming of the human capital development roadmap 8

11. STATE CAPACITY BUILDING • As Cambodia consolidates its democratic system and promotes social welfare, while increasingly dealing with a number of global problems ranging from financial regulation to climate change to increased economic integration with ASEAN, the human capital dimensions of government and associated bodies will become increasingly critical. • Little attention has been given to human capital development problems within the government sector itself. Moving forward implies plugging in the current gaps, while investing in long term interventions • It is crucial that the proposed Human Capital Road Map not only be linked to the Economic Diversification Program but also ensures that the State has the right set of skills in sufficient quantity to implement such programs. 9

12. STATE CAPACITY BUILDING Primary and Lower Secondary NER by Province 2009-10 • Additionally, the proposed Human Capital Road Map must ensure that human capital development occurs in an equitable way • Raising the quality of growth by promoting equitable access to education and skill development opportunities the wide access to innovation and knowledge is part of the process of raising productivity levels • While primary school enrolment is relatively uniform across Cambodia, the picture is quite different for secondary and tertiary education • In the case of lower secondary, levels can vary by a ratio of one to ten. 10 Source: Ministry of Planning Royal Government of Cambodia. Achieving Cambodia’s Millennium Development Goals. P.17

13. INVESTING IN HUMAN CAPITAL • The Report uses sectoral data on skills gaps and human capital priorities in major industries such as garments, tourism, mining, IT • However, current data does not allow us to provide a micro level set of recommendations on how to improve skill mismatches, how to provide incentives for vocational training as against entry to tertiary education institutions, how to attract skilled teachers to training institutions and so on • Plugging the information gap in the employment and skills area is an immediate priority. It will also be critical to understand more fully the concern with the “shortage of soft skills” • The most important aspect of future policy on human capital development is to adapt mechanisms to integrate long term and short term priorities 10

14. REASONS FOR OPTIMISM • To its credit, Cambodia has undertaken extensive institutional transformations: • Established completely new sources of growth and employment such as to bring enormous numbers of female workers into the labour force • Moved away from central planning to an open market economic system • Initiated a formal, organised system of dialogue with the private sector • Through both the Asian Economic Crisis and the more recent global meltdown, Cambodia has resisted protectionism, increased its engagement with the private sector, and invited aid organizations to work with it on many complex policy areas • Cambodia has also reached out to international and inter-regional organisations, such as ASEAN. ASEAN provides important opportunities to help improve Cambodia’s human capital through cooperation and mutual support. And as the chair of the organization next year, Cambodia has a unique chance to capitalize on the benefits of membership 11

15. REASONS FOR OPTIMISM • While future growth is unlikely to be a repeat of the past, the prospects for Cambodia are not as dreary as might appear from a dry recitation of global economic data or competitiveness surveys • Still, the construction of a Human Capital Road Map in line with Cambodia’s economic diversification, state capacity building and social welfare plans is the only way to prevent the build up of future structural bottlenecks such as those encountered in the decade of 1998-2008 • The economic diversification program within a knowledge economy productivity framework is one part of the policy agenda; the construction of a Human Capital Development Roadmap is the other essential part 11

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17. HUMAN CAPITAL ROADMAP 13

18. HUMAN CAPITAL ROADMAP 14

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