Cambodia Second-generation Systematic Country Jan. Diagnostic Update 2024 Main Report SCD2 (update) Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this pa- per do not necessarily reflect the views of the Executive Di- rectors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or accep- tance of such boundaries. Copyright Statement: The material in this publication is copyrighted. Copying and/ or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encour- ages dissemination of its work and will normally grant permis- sion to reproduce portions of the work promptly. For permis- sion to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clear- ance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http:// www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Wash- ington, DC 20433, USA, fax 202-522-2422, e-mail: pubrights@ worldbank.org. Main Report Cambodia Second-generation Systematic Country Diagnostic Update Acknowledgement The team would like to acknowledge and thank all those who provided input to this analysis. The lead authors are Faya Hayati (Senior Economist and Task Team Leader, EEAM1), Wendy Karamba (Economist and Task Team Leader, EEAPV) and Ha Thu Nguyen (Economist and Task Team Leader, CEAAE). The team included Hassan Noura (Consultant, EEAM2), Aka Kyaw Min Maw (Consultant, EEAM2), Seakheang Heng (EACSF, Program Assistant), Kimsun Tong (EEAPV), Giorgia Demarchi (Senior Social Development Specialist, SEAS1), Sama Khan (ET Consultant, SEAS1), Sadig Aliyev (Infrastructure Program Leader, IEADR) Chanin Manopiniwes (Senior Transport Economist, IEAT1), Veasna Bun (Senior Infrastructure Specialist, IEAT1), Bowen Wang (Transport Specialist, IEAT1), Sodeth Ly (Senior Economist, EEAM1), Cordula Rastogi (Senior Economist, ETIRI), Satya Prasad Sahu (Senior Trade Facilitation Specialist, ETIRI), Shinya Nishimura (Senior Financial Specialist, IEAE1) Ximing Peng (Senior Energy Specialist, IEAE1), Rutu Dave (Senior Energy Specialist, IEEES), Siou Chew Kuek (Senior Digital Development Specialist, IDD05), Weijing Ye (Digital Development Consultant), Sokbunthoeun So (Senior Public Sector Specialist, EEAG1), Serdar Yilmaz (Practice Manager EEAG1), Rath Daravuth Sithy (Public Sector Specialist, EEAG1), Ildrim Valley (Public Sector Specialist, EEAG1), Mark Giblett (Senior Infrastructure Finance Specialist, IPGPP), Paul Jacob Robyn (Senior Health Specialist), Fata No (Education Specialist, HEAED), Kenichi Nishikawa Chavez (Senior Social Protection Specialist, HEASP), Abla Safir (Senior Economist, HEASP), Sandra Baquie (Young Professional, SEAE2), Katelijn Van den Berg (Senior Environmental Specialist, SEAE2), Mizushi Satoh (Environmental Specialist, SEAE2), Daniel Mira-Salama (Lead Environmental Specialist, SEAE2), Muthukumara Mani (Lead Environmental Economist, SEAE2), Katherine Stapleton (Economist, EEAM1), Andre A. Bald (Lead Urban Specialist, SEAU1), Phyrum Kov (Senior Water Supply and Sanitation Specialist, SEAW1), Virak Chan (Senior Water Resources Management Specialist, SEAW1), Vica Rosario Bogaerts (Senior Disaster Risk Management Specialist, SEAU1), Sagita Muco (Senior Private Sector Specialist, ETIIC), Bradley Larson (Economist, EEAM2), Shawn W. Tan (Senior Economist, CEAAE), Kamal Muhammad (Consultant, EEAM2), Dourng Kakada (Operations Officer, CEAAE), Phally Puth (Investment Officer, CF4E2). The team would also like to thank Mariam J. Sherman (Country Director for Cambodia, Myanmar and Lao PDR), Maryam Salim (Country Manager for Cambodia), Thomas James Jacobs (Country Manager, CEAR3), Asad Yaqub (Resident Representative, CEAR7), Sebastian Eckardt (Practice Manager, EEAM1), Rinku Murgai (Practice Manager, EEAPV), John L. Nasir (Manager, CEAAE) for providing overall guidance as well as the peer reviewers Richard Record (Lead Country Economist, EECDR), Barjor E. Mehta (Lead Urban Specialist, SEAU2), Lars M. Sondergaard (Lead Economist, HEAED), Reena Badiani-Magnusson (Senior Economist, EECDR), and Obert Pimhidzai (Lead Economist, EECPV) for valuable feedback and suggestions. IV Table of Contents 01 Executive Summary 01–16 17 CHAPTER 1: Introduction and update on country context 17–30 31 CHAPTER 2: Assessment of progress on SCD1 priorities 31–68 69 CHAPTER 3: Updated SCD2 outcomes and development priorities 69–102 V Executive Summary S ince Cambodia's first Systematic Country Diagnostic (SCD1, May 2017), the country’s economy has continued to grow strongly, reduce poverty and boost shared prosper- ity. Cambodia’s economic growth averaged 4.4 percent in the five years since the SCD1, down from 7.1 percent in the preceding five years (Figure 1). Howev- er, this slowdown is attributable solely to the COVID-19 pan- demic, which triggered the first economic contraction in 25 years and a rise in poverty in 2020. Prior to the pandemic, Cambodia’s economic growth averaged 7.2 percent between 2017 and 2019, largely unchanged from the preceding five years, ranking its growth rate as the 11th fastest in the world and the 5th among middle-income countries during that peri- od. Moreover, Cambodia’s growth model continued to deliver sustained and broad-based progress against the World Bank’s goals of ending extreme poverty and boosting shared pros- perity on a livable planet. Before the onset of the COVID-19 pandemic, Cambodia’s poverty rate fell by about a third from 26.3 percent in 2014 to 17.8 percent in 2019/20. In addition, growth supported a broad-based acceleration in consumption growth, including for the poorest 40 percent of households (whose consumption growth accelerated by about a third to 2.7 percent per annum). Growth continued to be driven largely by factor accu- mulation, with limited contributions from productivity, which is not sustainable over the long term. Since the SCD1, Cambodia’s strong growth has continued to be driven by high levels of investment (capital accumulation) and growing numbers of Cambodians entering the workforce (labor quanti- ty accumulation). There was, however, a declining contribution to growth from labor productivity (labor quality) and an ongo- ing negative contribution from total factor productivity (TFP). At the same time, the historical reallocation of workers from low-productivity agriculture to higher-productivity manufac- turing and services has stalled since 2016, while productivity growth within manufacturing and services has been subopti- mal. The net result of these trends has been a halving of ag- gregate labor productivity growth to just 2.4 percent since the 1 SCD1. Overall, Cambodia’s aggregate labor productivity lev- FIG. 1 Update on growth, poverty reduction and shared prosperity since SCD1 Real GDP growth, Percent (period average) 2012-16 7.1% 2017-19 (pre-COVID) 7.2% 2020-22 (COVID) 1.6% 2017-22 4.4% Poverty rate, Percent of population 2014 26.3% 2019/20 17.8% 32% Consumption growth of bottom 40% by income, Percent (period average) 2009-14 2.0% 2014-19/20 35% 2.7% Source: Cambodia economic update, World Bank (May 2023) and CSES 2014 and 2019/20. els remain the lowest amongst its structural peers, with lim- ited convergence over time. To ensure that growth remains sustainable and inclusive over the long-term, Cambodia will need to increase the contributions to growth from labor and total factor productivity over time. This will require addition- al structural reform to strengthen the business environment as well as larger – and higher quality – investments in public infrastructure, education & skills, health and social protection. Long-term prosperity also critically depends on maintaining a livable planet. Climate change could amplify Cambodia’s exist- ing development challenges, with potentially sizable impacts on growth, trade, debt, and poverty reduction. Mitigating these risks will require further efforts to build climate resilience. The SCD1 identified three pathways, one cross-cutting solution, and ten critical areas for development through which Cambodia could end extreme poverty and boost shared prosperity. Pathway I: Increasing economic com- petitiveness and diversification aimed to sustain strong growth and create jobs, with the highest priority identified as reducing firm costs (development area 1). Pathway II: Building human assets aimed to facilitate economic mobility and shared pros- perity, with the highest priority identified as endowing people with skills (development area 5). Pathway III: Ensuring a sus- tainable growth pattern aimed to promote investment in natural capital, climate resilience, and sustainable urban development. Reform in public administration and public financial manage- ment was identified as a fourth, cross cutting solution critical 2 for the realization of opportunities across all three pathways. This SCD Update (SCD2) finds that most pathways iden- tified in SCD1 made moderate progress in the past five years, except for building human assets (Pathway II) which recorded only modest progress (Figure 2). Pathway I’s moderate progress was driven by strong export product di- versification, driven by improved preferential trade access to the United States, and modest improvements in international competitiveness.A Pathway III’s moderate progress was driven by improved resilience to natural disasters as well as gains on environmental performance and urban development. Strong improvements in government effectiveness and the rule of law drove Cross-cutting IV's moderate progress. In contrast, Path- way II’s only modest progress was driven by mixed develop- ments across health, education, and social protection—with improvements in access not consistently delivering significant- ly better outcomes. Despite this progress, significant challeng- es remain across all pathways, with Cambodia ranking towards the bottom of its structural peers on most indicators and in the bottom two quintiles globally. Progress was also mixed across the ten key areas for development, with strong progress on reducing firm costs (area 1) and moderate progress on public sector reform (area 10), but only modest or weak progress in all other areas. Cambodia made moderate progress on increasing eco- nomic competitiveness and diversification (Pathway I), but the country’s growth model remains highly con- centrated and vulnerable to external shocks. Cambodia significantly diversified its export basket away from garments over the past five years and reduced its export product con- centration by more than any of its structural peers. This diver- sification was driven by strong growth in more complex export products such as travel goods—driven by improved preferen- tial trade access to the United States (US). Cambodia also im- proved its relative global international competitiveness ranking by three places, a stronger improvement than most structural peers, but continues to rank poorly on competitiveness rela- tive to its structural peers and globally. The moderate overall progress on Pathway I was supported by strong progress on lowering firm costs (development area 1), with the costs of starting and operating a business, electricity and logistics all falling significantly. There were also positive, albeit smaller, im- provements in infrastructure (area 2), financial stability & inclu- sion (area 3), and agricultural modernization (area 4). Overall, however, many aspects of Cambodia’s growth model remain highly concentrated, with a heavy reliance on: (i) low-skill, A Note on methodology: progress at the pathway level is assessed based on Cambodia’s performance on the desired outcomes relative to structural peers. Hence, the progress on the pathways is independent of the progress on the areas for development under the pathway (i.e. not an average of the progress on the areas). Similarly, progress on the areas for development is assessed based on Cambodia’s performance on the desired outcomes relative to structural peers. Hence, while policy changes in these areas are monitored and 3 acknowledged, policy changes in and of themselves do not determine the rating. “Growth continued to be driven largely by factor accumulation, with limited contributions from productivity, which is not sustainable over the long term” FIG. 2 Progress on pathways and areas for development outlined in the SCD1 Key constraint to growth & twin goals from SCD1: Highest High Modest Progress since SCD1: Strong Moderate Modest Weak Poor Progress on Pathways Areas for development Progress and their SCD1 priority ratings I. Increasing economic 1. Reducing the costs of firm establishment and operation competitiveness and (including business environment, informal fees, trade Strong facilitation, electricity costs) diversification to sustain strong growth and create jobs 2. Boosting public and private investment in infrastructure and Weak machinery acquisition while developing capital markets 3. Strengthening regulation and supervision of the financial sector to mitigate risks from strong credit growth, while Weak building further financial inclusion 4. Fostering agricultural modernization in the aftermath of the commodity price boom Weak II. Building human 5. Endowing people with skills by boosting attainment and Modest learning outcomes of secondary and higher education assets to facilitate economic mobility and shared prosperity 6. Investing in the early years (nutrition, pre-primary education) Modest 7. Protecting households from shocks (OOP in health, DRM, social protection) Modest III. Ensuring a 8. Maintaining and developing natural capital, while Weak strengthening climate resilience sustainable growth pattern by investing in natural capital, climate 9. Promoting competitive, sustainable, and inclusive cities through integrated urban planning Modest resilience, and sustainable urban development IV. Cross-cutting 10. Public administration and public financial management Moderate reforms for improved service delivery 4 Source: World Bank staff analysis. low-value-added manufacturing activities; (i) a small number of key export markets (primarily the US and Europe); and (iii) capital accumulation funded to a large extent from foreign di- rect investment (FDI). This concentration leaves Cambodia vulnerable to risks stemming from global megatrends such as increasing trade protectionism and automation. To enhance its growth resilience, Cambodia needs to undertake deeper eco- nomic and structural reforms to improve its competitiveness, diversification, and productivity. These reforms should aim to foster higher value-added activities, deepen regional trade in- tegration, and increase the contributions to growth from hu- man capital and technology. In contrast, Cambodia made only modest progress in building human assets (Pathway II), which is becoming a more considerable risk to the country’s future econom- ic development and prosperity. Cambodia made only mod- est progress since the SCD1, relative to its structural peers, on building its human assets. The modest overall improvement on Pathway II reflects modest – but mixed – progress on educa- tion & skills (development area 5), investing in the early years (area 6), and social protection (area 7). For example, while there were strong improvements in access to education, learn- ing outcomes declined significantly (partly due to prolonged COVID-19 shutdowns). Moreover, a lack of basic foundations in primary school is having negative knock-on effects to second- ary school, with international tests revealing that Cambodian children perform poorly compared to their international peers and that they fall further behind as they progress from primary to secondary school. For young children, mortality and nutri- tion metrics improved since the SCD1, but pre-primary enroll- ment rates fell. Finally, Cambodia made considerable progress on strengthening its social protection system since the SCD1. Social health insurance programs for the poor were expanded and the country launched cash transfer programs (CTPs), ini- tially to support pregnant women, and then again to support poor households during COVID-19. However, the share of out- of-pocket health expenses rose and remain amongst the high- est in the world. Overall, Cambodia continues to rank poorly on human capital development compared to its structural peers (second last) and by global standards (second lowest quintile), which contributes to the country’s poor productivity perfor- mance. In addition, while improving, limited protection from economic, health and environmental shocks remains a key barrier to the accumulation of human assets. For example, the combination of economic pressures and plentiful low-skill jobs is incentivizing high secondary school dropout rates, which is boosting short-term incomes potentially at the expense of fu- ture prosperity. During consultations for the SCD2, Cambodian public and private sector stakeholders cited a lack of educa- 5 tion & skills as the single biggest constraint to the country’s future economic development. Progress on ensuring a sustainable pattern of growth (Pathway III) was moderate, but significant challeng- es remain. Cambodia made more progress than most of its structural peers since the SCD1 on reducing the development risks stemming from natural disasters as well as poor man- agement of the environment and urban development. The moderate overall progress on Pathway III was supported by weak, albeit mixed, progress on maintaining and developing natural capital, while strengthening climate resilience (devel- opment area 8) and modest progress on promoting compet- itive, sustainable, and inclusive cities (area 9). For example, Cambodia significantly strengthened its conservation laws and international climate change commitments. However, these policy actions have yet to significantly improve outcomes such as overfishing, deforestation, or carbon emissions. In contrast, there were positive improvements in urban outcomes (albeit from a poor starting point) despite rapid urbanization and lim- ited policy reform, with significant reductions in urban slums and air pollution as well as increased access to safe drink- ing water. While Cambodia outperforms most of its structur- al peers on environmental sustainability, it ranks in the lowest quintile globally. Moreover, despite the progress on urban de- velopment, Cambodia’s cities remain among the least livable in the world and amongst its structural peers. Moreover, the combination of rapid urbanization, constrained resources, and inadequate urban management are making Cambodia's cities less inclusive, more inefficient, and a growing driver of carbon emissions. Against the backdrop of accelerating urbanization, these problems are set to impact a growing share of Cambodi- ans and become bigger development risks in the future. Finally, Cambodia made moderate progress on improv- ing public sector governance and capacity (cross-cut- ting IV), but these improvements were off a low base, with deeper reform needed. Cambodia made more progress than most of its structural peers since the SCD1 on improving government effectiveness, the rule of law and control of cor- ruption, albeit from a relatively poor starting position. Strong public financial management (PFM) reforms largely support- ed the moderate overall progress on Cross-Cutting IV, which helped reduce perceptions of corruption and boost domestic revenue mobilization. Higher revenues in turn supported in- creased public spending on key development priorities, espe- cially in the social sector, and public sector wage rises. Overall, however, Cambodia continues to rank very lowly on most mea- sures of governance compared to its structural peers and by global standards (bottom two quintiles). Moreover, increased 6 TAB. 1 Summary of refreshed SCD2 outcomes, development areas and policy priorities Desired Areas for Priority Selected policy High Level development rating priorities in this area Outcomes (change (HLO) since SCD1) I. Improved 1. Improve � Make doing business easier for firms, including by digitalizing business services, improving access the business the competition framework, and strengthening the to high- environment for HIGH enforcement of commercial contracts (DOWNGRADE) quality formal firms � Further lower electricity prices, including by institutionalizing competitive processes for power jobs procurement through increased 2. Boost public and � Address specific infrastructure gaps in regional economic connectivity and urban areas (i.e., transport, private investment energy, digital, sanitation) by increasing levels of public competitive- in infrastructure investment ness, HIGHEST � De-risk and ensure successful implementation diversification (UPGRADE) of more public-private-partnership (PPP) projects, including by operationalizing the new PPP law, building and capacity of executing agencies, and by ensuring productivity that competitive bidding is the primary method of procurement 3. Reduce financial � Boost the capacity of key regulators to monitor and manage financial risks, including by sector risks and MODERATE strengthening financial sector supervision increase financial (UNCHANGED) � Boost access to finance for SMEs and inclusion marginalized groups, including women entrepreneurs, the poor and landless rural workers 4. Foster � Increase agricultural and livestock productivity, including by supporting greater mechanization and agricultural MODERATE facilitating easier access to green technologies modernization (DOWNGRADE) � Support higher value-addition, especially for agri- food processing and SMEs II. Upgraded 5. Upgrade the � Improve equitable access to quality learning in primary schools, including by improving access for and better skills of the existing marginalized groups; boosting teacher numbers, training protected and emerging & capacity; and strengthening the focus HIGHEST human workforce (UNCHANGED) on foundational skills � Increase secondary school completion rates, capital by addressing the lack of basic foundations, financial to facilitate and gender barriers, and high opportunity costs driving economic high dropout rates mobility and shared 6. Ensure that � Reduce child mortality, by expanding access to health services for pregnant women and children under prosperity future generations 2 years have higher human HIGH � Boost enrolment in early childhood education (UNCHANGED) capital by investing (ECE), by expanding quality provision of public and private preschools while adopting measures to stimulate in young children demand 7. Support � Strengthen effectiveness of existing health insurance programs, by expanding their population households to be coverage and increasing benefit levels more resilient to � Increase coverage of social assistance and life-cycle risks social insurance, to protect poor and vulnerable households from life-cycle risks and in the face of � Improve the effectiveness of social protection shocks HIGH delivery by strengthening delivery mechanisms, (UPGRADE) for effective outreach, targeting, payment delivery, and monitoring � Upgrade the adaptability and responsiveness of the social protection system, by establishing a framework and detailed implementation guidelines for shock-responsive social protection, and by developing and implementing disaster risk financing mechanisms to support shock responses 7 III. Enhanced 8. Conserve and � Strengthen climate change mitigation, adaptation and disaster management by effectively implementing livability and strengthen the recently approved national plans as well as improving resilience resilience of the HIGH disaster preparedness and response systems by ensuring natural environment (UNCHANGED) � Reduce the growth in greenhouse gas emissions by accelerating the transition from thermal power to a sustainable to help maintain a renewables pattern of livable planet growth 9. Build livable, � Improve the livability of cities, by upgrading basic urban services such as piped water, sanitation, solid inclusive, and MODERATE waste management, and transport sustainable cities (UNCHANGED) � Develop green and resilient cities, including by investing in urban planning that mainstreams climate adaptation and mitigation measures IV. Cross- 10. Strengthen � Improve the quality of public spending, including through better targeting and distribution of resources to Cutting governance and HIGH areas of greatest need public sector (UNCHANGED) � Strengthen public sector accountability, by capacity deepening public sector institutional reforms (E.g., performance management and decentralization) public sector salaries and spending on the social sector has yet to translate into significantly better outcomes (as highlighted by the modest progress on Pathway II). Deeper public sector reforms that strengthen accountability and performance man- agement will be required to further improve public sector gov- ernance, capacity, and the quality of spending. This SCD Update (SCD2) outlines a refreshed set of out- comes, development areas and policy priorities to help ensure strong, inclusive, and sustainable growth over the next five years (Table 1). In addition to new analysis, the re- freshed priorities are informed by: (i) extensive consultations with stakeholders from the public, private and civil society sec- tors in Cambodia that took place between May and September 2023; and (ii) Cambodia's Pentagonal Development Strategy (finalized in August 2023), which outlines updated priorities for the 2023-2028 legislative term. The main changes in priorities compared to SCD1 is that boosting investment in infrastructure (development area 2) has been upgraded to one of Cambodia's ‘highest priorities’ and that protecting households from shocks (development area 7) has been upgraded to a ‘high priority’. Since priorities are by their nature relative, the remaining de- velopment areas—while remaining important for Cambodia’s development—have been assigned a similar (unchanged) or 8 lower (downgraded) priority level compared to the SCD1. Upgrading Cambodia's infrastructure and further im- provements to the business environment are the highest priorities under High-Level Outcome (HLO) I: Improved access to high-quality formal jobs. Sustaining strong and high-quality economic, jobs and wages growth will re- quire deeper reforms to increase the Cambodian economy's economic competitiveness, diversification, and productivity. To support this objective, policy priorities include the need to: ▶ Maintain momentum on making doing business easier for firms (development area 1, downgraded to a ‘high priority’). While considerable progress was made since the SCD1, firm costs and barriers remain relatively high compared to structur- al peers. Key policy options in this area include further simpli- fying and digitalizing business services and lowering electric- ity prices (e.g., by institutionalizing competitive processes for power procurement). ▶ Boost public and private investment in infrastructure (area 2, upgraded to ‘highest priority’). Cambodia has a large infra- structure financing gap and subpar regional connectivity, tele- communications, and urban infrastructure relative to structur- al peers and neighbors. Key policy options include increasing public investment in infrastructure to address specific gaps as well as ensuring that more public-private-partnership (PPP) projects are successfully implemented. ▶ Reduce financial sector risks and increase financial inclu- sion (area 3, unchanged at ‘moderate priority’). Cambodia now has the second highest rate of outstanding credit to the private sector in East Asia (after China)—much of it linked to real estate-related activities—which poses a growing macro-pru- dential risk. At the same time, the population has relatively low access to banking and digital payment services. Key policy options include boosting the capacity of regulators to monitor and manage financial risks and boosting access to finance for marginalized groups. ▶ Foster agricultural modernization (area 4, downgraded to a ‘moderate priority’). Despite progress since the SCD1, modern- ization remains nascent relative to structure peers and a lack of labor shedding is contributing to low sector productivity and declining real wages for workers. Key policy options include in- creasing agricultural and livestock productivity and supporting higher value-addition by fostering greater mechanization and access to green technologies. Upgrading skills remains the highest priority under HLO II: Upgraded and better protected human capital. Upgrading, and better protecting the human capital of Cam- 9 bodia’s people has become more urgent given the low start- ing point, only modest progress since the SCD1, growing skills shortages, and declining labor productivity growth. To support this objective, policy priorities include the need to: ▶ Upgrade the skills of the existing and emerging workforce (development area 5, unchanged at ‘highest priority’). Despite improved enrollment since the SCD1, learning outcomes are low and have declined, and secondary school dropout rates are high. Key policy options in this area include: (i) improving equitable access to higher quality learning in primary schools (E.g., by improving access for marginalized groups; boosting teacher numbers, training and capacity; and strengthening the focus on foundational skills); (ii) increasing secondary school completion rates (E.g., by targeting support to vulnerable stu- dents); and (iii) upgrading the quality of TVET education (E.g., by enhancing the autonomy of institutions and strengthening industry partnerships). ▶ Ensure that future generations have higher human capi- tal by investing in young children (area 6, unchanged at ‘high priority’). Despite progress since the SCD1, child mortality and nutrition remain relatively high and there is a need to re- verse declines in pre-primary enrollment. Key policy options include: (i) expanding access to health services for pregnant women and young children; and (ii) expanding the provision of high-quality preschools combined with measures to stimulate demand (e.g., raising awareness of the benefits). ▶ Support households to be more resilient to life-cycle risks and in the face of shocks (area 7, upgraded to ‘high priority). Despite progress since the SCD1, limited protection combined with persistent income, food, and health insecurity (alongside high opportunity costs from plentiful low-skill jobs) are under- mining incentives for households to make appropriate levels of investments to upgrade their human assets. Key policy options include: (i) expanding the population coverage and increasing the benefit levels of existing health insurance programs; and (ii) establishing a shock-responsive social protection system. Conserving and strengthening the resilience of the nat- ural environment remains the highest priority under HLO III: Enhanced livability and resilience. Enhancing the livability and resilience of Cambodia’s natural and urban environments remains critical for ensuring a sustainable pat- tern of growth, given the relatively high exposure to risk from natural disasters and poor performance on environmental management and urban development. To support this objec- tive, policy priorities include the need to: 10 ▶ Conserve and strengthen the resilience of the natural en- vironment (development area 8, unchanged at ‘high priority’). Despite progress since the SCD1, Cambodia continues to have high rates of environmental degradation and rapidly rising rates of carbon emissions (albeit off a low base). Key policy options in this area include: strengthening climate change mit- igation, adaptation and disaster management and accelerating the transition from thermal power to renewables. ▶ Build livable, inclusive, and sustainable cities (area 9, un- changed at ‘moderate priority) given accelerating urbanization, poor livability, and the growing contribution of urban areas to carbon emissions. Key policy options in this area include: (i) upgrading basic urban services such as piped water, sanitation, solid waste management, and transport; and (ii) investing in urban planning that mainstreams climate adaptation and mit- igation measures. Strengthening governance and public sector capaci- ty remains a critical cross-cutting priority to support achieving the three high-level outcomes. Despite the progress since the SCD1, Cambodia continues to rank low- ly compared to its structural peers and globally (bottom two quintiles) on most governance and public sector capacity mea- sures. Policy options include the need to: (i) improve the qual- ity of public spending, especially in education and health (e.g., through better targeting and distribution of resources to areas of greatest need); and (ii) strengthen public sector account- ability by deepening public sector institutional reforms (e.g., performance management and decentralization). Snapshot of progress since SCD1 Pathways GOAL Poverty reduction and shared prosperity 8.5PP 35% reduction in poverty rate faster income growth in 5 years (to 17.8% in 2019), for the poorest 40% of households enabling 1.2 million Cambodians (rising from 2 to 2.7% per annum) to escape poverty PATH WAY 1 Increasing economic competitiveness and diversification ↑42 ↑3 in global ranking in global ranking on on export diversification competitiveness (most improved among peers) (3rd most improved among peers) PATH WAY 2 Building human assets ↑3 ↓10% in global ranking on reduction in learning human development assessment results (4th most improved for Grade 6 (8 percent among peers) fall in Khmer and 11 percent in Maths) 13 PAT HWAY 3 Ensuring a sustainable growth pattern ↑16 ↑5 in global ranking in global ranking on on risk exposure environmental performance (most improved among peers) (2nd most improved among peers) CROSS-CU TTI NG 4 Public sector reform ↑10% ↑7% ↑3% globally on globally on globally control government rule of law of corruption effectiveness (most improved (2nd most improved (most improved among peers) among peers) among peers) ↓5 globally on regulatory quality (3rd worst change among peers) 14 Areas for Development 1 Reducing the costs of firm establishment and operation ↓58% ↓20% ↓18% in cost of starting in logistics costs in electricity prices a business for industrial users 2 Boosting public and private investment ↑15% ↑125% gross capital formation telecommunications infrastructure 3 Strengthening financial sector regulation and financial inclusion ↓18% ↑50% in bank credit growth adults with a bank account (which reduces risks) 4 Fostering agricultural modernization ↑33% ↑28% in share of processed food in farm machinery exports (to 8% of total) per worker 5 Endowing people with skills ↑77% ↑52% ↓8% ↓11% in upper in lower in national in national math secondary secondary reading scores scores enrollment (to enrollment 30%) (to 47%) ↑1PP ↑3PP in workforce completing high of workers upgraded to school and/or entering college medium or high skill job (to 20%) 6 Investing in the early years ↓54% ↓31% ↓21% in under-5 in prevalence in early childhood education mortality rate of stunting enrollment rates (to 34%) 7 Protecting households from shocks ↑7% out-of-pocket heath spending ↑2.8 increase in poverty during COVID-19 (to 61% of total) pp pandemic 8Maintaining natural capital, while strengthening climate resilience ↑27% ↓5% ↑67% overfishing permanent carbon emissions deforestation per capita (off very low base) 9 Promoting competitive, sustainable, and inclusive cities ↓16% ↑16% ↓20% urban residents urban residents with air pollution living in slums access to piped water (to 46%) (to 80%) 10 Public administration and public financial management reforms ↑36% ↑75% government revenue government spending on health (to 22.5% of GDP) and education (to 5.6% of GDP) 16 17 Chapter 1 Introduction & update on country context 1.1 Introduction 1.2 Update on economic growth 1.3 Update on reducing extreme poverty and boosting 18 shared prosperity 1.1 Introduction T his Systematic Country Diagnostic Update (SCD2) updates Cambodia's first System- atic Country Diagnostic (SCD1).1 The SCD2 Update will help inform the World Bank’s next Country Partnership Framework (CPF) 2025- 2029 and contribute to the policy discussion in Cambodia. This SCD2 report summarizes the key findings from new World Bank analysis and extensive consultations to provide an updated set of desired outcomes, development areas and policy priorities to support Cambodia’s sustainable and inclusive development. Chapter 1 provides an update on Cambodia’s economic growth in the five years since the SCD1 (2017 to 2022) and assesses progress towards achieving the World Bank’s goals of ending extreme poverty and boosting shared prosperity on a livable planet (i.e., the World Bank’s “three P” mission of Pov- erty, Prosperity, and Planet). Chapter 2 assesses progress on the development areas and policy priorities outlined in the SCD1, their drivers, and scruti- nizes what has held back outcomes. This chapter also assesses progress against the key risks that the SCD1 identified as having the potential to undermine Cambodia’s development, namely, threats to: (i) growth, especially from a lack of economic di- versification; (ii) macro-fiscal stability, especially from a credit boom; (iii) social sustainability, especially from an exclusion of vulnerable groups; and (iv) sustainable development, especial- ly from a combination of degradation of natural capital, climate and disaster risks, and poor urban planning. Chapter 3 outlines a refreshed set of outcomes, develop- ment areas and policy priorities to support Cambodia's con- tinued strong, inclusive, and sustainable growth over the next five years. Cambodia SCD2 Background Paper is an accompanying compendium that compiles robust evidence and analysis on the progress assessment of each Pathway under SCD1 and an annex on knowledge gaps. 1 Cambodia's first Systematic Country Diagnostic (SCD1), Report No.115189-KH, May 2017, 19 World Bank. Recent changes in the global and domestic context since 2017 were critical to keep in mind when assessing progress/challenges against the areas for development outlined in the SCD1: A The COVID-19 pandemic The pandemic that commenced in early 2020—about halfway through the period under examination (2017 to 2022)—was a major point of disruption and discontinuity. The SCD2 exam- ines the impact and legacy of COVID-19 in Cambodia and dif- ferentiates between progress/challenges pre- and post-pan- demic. Cambodia remains vulnerable to pandemic risks, being in a global hotspot for emerging infectious diseases (EIDs), zoonoses, and transboundary animal diseases (TADs). B A more complicated and volatile global environment Russia’s invasion of Ukraine triggered a global energy and food price shock and a new round of international trade disrup- tions. Higher prices for food and energy immediately hurt pur- chasing power and poverty in developing countries, including Cambodia.2 These developments exacerbated the global sup- ply-side issues during COVID-19 and contributed to a broad- based outbreak of inflation, especially in advanced economies. Central banks in advanced economies have embarked on the fastest and most synchronized round of monetary tightening in decades to contain this inflation outbreak. This monetary 2 Cambodia tightening has triggered increased volatility in currency and fi- Economic Update nancial markets and significantly increased the risk of another (December 2022). global recession. C Increased frequency of natural disasters Cambodia experienced major flooding in 2020 and 2022. These events raise attention and concerns about climate change-re- lated disasters' growing and potentially accelerating impact. 20 1.2 Update on economic growth C ambodia’s economy has continued to grow strongly since the SCD1, interrupt- ed by the devastating but largely tempo- rary impacts of the COVID-19 pandem- ic. Cambodia’s growth averaged 7.2 percent between 2017 and 2019, largely unchanged from the preceding five years. This growth rate was the 11th fastest in the world and the 5th among middle-income coun- tries. However, the COVID-19 pandemic temporarily set back Cambodia’s economic development, with the economy con- tracting by 3.1 percent in 2020 (Figure 3), the first in 25 years. Moreover, growth fell by about 10 percentage points from its pre-pandemic average growth rate, among East Asia's worst declines. The pandemic curbed the construction and real es- tate boom and led to tourism collapsing. This devastating eco- nomic impact stemmed partly from Cambodia’s lack of eco- nomic diversification and low human capital (risks highlighted in the SCD1). However, the economy has since re- bounded, recording growth of 5.2 percent in 2022. 11th Over the medium term, the economy is forecast to grow by an average of 6 percent between 2023 and 2026. Although the economy has recovered from Cambodia's growth rate is ranked 11th COVID-19, risks remain and have been compounded fastest in the world by a volatile global environment.3 FIG. 3 Economic growth in Cambodia since the SCD1 and the impact of the COVID-19 pandemic Real GDP growth in Cambodia, Percent Difference in the average real growth between 2010-19 and 2020, Percent -3 China 7.0% 7.5 % 7.1% -3 Vietnam 5.2% -7 Lao PDR 3.0% -8 Indonesia -10 Thailand 2017 2018 2019 2021 2022 2020 -10 Cambodia -11 Malaysia -3.1 % -13 Mongolia Source: Cambodia Economic Update, World Bank (May 2023); 3 Refer to the Cambodia Economic Update and World Bank staff calculations using data from the World (World Bank, May 2023) for more details on 21 Bank Development Indicators. the short-term growth outlook and risks. Cambodia has also maintained macro-fiscal stability and has the fiscal space to further invest in infrastruc- ture and human development (provided this spending delivers value for money). Cambodia’s deficits and debt rose quickly during the COVID-19 pandemic amid sluggish revenue collection and rising demand for health and social assistance spending. However, Cambodia remains at low risk of debt distress, with the debt-to-GDP ratio projected to rise to 40 percent of GDP during the next decade.4 While fiscal consolidation will be necessary over the medium term, this consolidation can proceed at a relatively gradual pace given manageable public debt levels. However, the priority in public spending is to spend better, not simply spend more. Elsewhere, continued rapid growth in private sector credit and debt, risks identified in the SCD1, remain a threat to macro-financial sta- bility and require ongoing monitoring. Cambodia’s strong economic growth continued to be driven by factor accumulation, with limited contributions from productivity, which is not sustainable in the long term. Cambodia’s growth model has historically depended on factor (especially capital) accumulation, with low contributions from labor and total factor productivity (TFP).5 Cambodia’s low TFP growth is despite continued high inflows of foreign direct investment (FDI), which has traditionally supported technolo- gy transfer, and is in part due to most investment increasingly going into low-productivity sectors such as real estate and con- struction (a trend that began pre-COVID). Previous analysis has traced Cambodia’s poor productivity performance to: (1) low human capital; (2) resource misallocation stemming from a lack of competition and market signals; and (3) low within-firm productivity growth stemming from a disabling business envi- ronment. This growth model was showing signs of improvement between 2017 and 2019, with the negative contribution from TFP declining significantly (Figure 4). However, this positive mo- mentum was derailed by the onset of the COVID-19 pandemic, which largely shutdown the services sector, especially interna- 4 Debt tional tourism. Growth during the pandemic period reverted to Sustainability Analysis (2021), a strong dependence on physical capital accumulation, espe- jointly conducted by the World cially in the construction sector, and TFP collapsed and become Bank and International a major drag on growth. In addition, there continued to be only Monetary Fund. small contributions to growth from human capital accumulation 5 Resilient Development: (labor quality)—especially pre-pandemic—which is linked to A Strategy limited progress on building human capital and skills (highlight- to Diversify Cambodia’s ed in Chapter 2 under Pathway II). Growth Model; Cambodia Country Economic In parallel, Cambodia’s broad shift from employment in Memorandum agriculture to industry and services has stalled, contrib- (World Bank, 2021). uting to the slowdown in labor productivity growth. Over the past two decades, a shift of workers from lower-productiv- 22 FIG. 4 Contributions to growth since the SCD1 Contributions to growth, by sector Share of total growth (period average) Statistical 5% 7% 12% 10% discrepancy Agriculture 47% 39% 6% 24% 12% Services 35% 61% 33% Other Industries 24% (including 38% construction) 20% 19% Manufacturing -3% 2012-16 2017-19 2020-22 2017-22 (pre-COVID) (COVID) Contributions to growth, by source Share of total growth (period average) 8% 20% 1% Labor quality 16% Labor quantity 19% 5% 15% Capital 104% 90% -5% 324% 135% TFP -28% -52% -251% 2012-16 2017-19 2020-22 2017-22 (pre-COVID) (COVID) Source: World Bank Staff ity agriculture to higher-productivity industry and services has calculations using been a big driver of aggregate productivity growth and pover- data from and Total Economy ty reduction in Cambodia. This large intersectoral reallocation Database (TED), The Conference of labor also helped compensate for sub-optimal productivity Board (2022); and WDI 2021. growth within the manufacturing and services sectors.6 Be- tween 2011 and 2016 alone, agriculture’s share of employment dropped by 20 percentage points from 56 percent to 36 per- 6 Resilient cent (Figure 5). However, the agricultural sector shed almost Development: A Strategy no labor since 2016, a trend that is largely consistent both to Diversify pre- and post-pandemic. The lack of labor shedding in agri- Cambodia’s Growth Model; culture, combined with the rapid growth of the construction Cambodia Country sector, means fewer workers are shifting into higher produc- Economic Memorandum tivity sectors such as manufacturing and services. These trends (World Bank, 2021). —combined with sub-optimal productivity growth within man- ufacturing and services—have led to a sharp slowdown in ag- 23 gregate labor productivity growth over the past five years from FIG. 5 Structural changes in the Cambodian economy since the SCD1 GDP by sector Share of total, Percent Manufacturing 15% 16% 16% 18% 7% Other Industries 13% 18% 20% (including construction) 38% 40% Services 39% 34% 35% Agriculture 25% 21% 22% Statistical discrepancy 6% 6% 6% 7% 2011 2016 2019 (pre-covid) 2021 Workers by sector Share of total employment, Percent Agriculture 56% 36% 35% 36% 37% 38% 37% 27% Services 27% 26% 27% 17% Industry 2011 2016 2019 (pre-covid) 2021 Labor productivity Output per worker, 2021 PPP $ Thailand 35,683 Guatemala 23,886 Philippines 23,728 Vietnam 21,512 Bangladesh 17,086 Myanmar 10,935 CAMBODIA 2021 7,757 2.4% p.a. Source: World Development Indicators (WDI); Cambodia Socio-Economic 2016 6,902 5.6% p.a. Survey (CSES) 2021; and Total Econ- 5,503 omy Database (TED), The Conference 2011 Board (2022), an average of 5.6 percent per annum between 2011 and 2016 to 2.4 percent between 2016 and 2021. Cambodia’s aggregate labor productivity level remains the lowest amongst its struc- tural peers, well behind Myanmar and Bangladesh and about a third of Vietnam, with limited convergence. Higher labor productivity growth is essential for sustainable wage growth, poverty reduction, and shared prosperity. In the longer term, lifting the contributions to growth from human capital and TFP 24 —including by boosting investment in education, social protec- tion, infrastructure, and machinery—remain critical priorities to ensure that Cambodia’s growth can remain sustainable and inclusive over the long term. To ensure that growth remains sustainable and inclu- sive, Cambodia will need to increase the contribution to growth from productivity over time. Boosting TFP growth will require additional structural reform to, for exam- ple, strengthen the business environment, quality of infrastruc- ture, domestic competition, and international competitiveness. These issues are further explored in Chapter 2 under Path- way I: Increasing economic competitiveness and diversifica- tion. Boosting labor productivity and the contribution to growth from human capital accumulation will require greater, and higher quality, investments in education & skills, health, and social protection. These issues are explored in Chapter 2 under Pathway II: Building human assets. Without further progress on this productivity and human capital agenda, there is a risk that Cambodia may not be able to maintain its current strong rates of economic growth and poverty reduction over the me- dium- to long-term. In addition, long-term prosperity also critically depends on maintaining Cambodia’s natural environment and a livable planet. The recently published Cambodia Country Cli- mate Development Report (CCDR)7 highlighted that climate change could amplify Cambodia’s existing development chal- lenges, with potentially sizable impacts on growth, trade, debt, and poverty reduction. The report estimated that, without ac- tion, the impacts of climate change could lower Cambodia’s GDP by around 3 to 9 percent by 2050, due to asset losses from floods and estimates of the impact of climate change on labor productivity, crop yields, and tourism. In addition, without adaptation, the report estimated that the impacts of climate change could increase the poverty rate by between 0.3 to 6.0 percentage points by 2040, depending on the climate scenario. Finally, as a small, open economy highly dependent on trade and foreign direct investment (FDI), the report noted that Cambodia will be highly affected by the accelerated decar- bonization and changing consumption and production patterns in the rest of the world. However, the report also highlighted that building climate resilience also offers an opportunity, not only to mitigate climate risks, but also to concurrently further development outcomes. With the right policy choices and a vibrant private sector, this could offer opportunities for export diversification, job creation, and growth. These issues are fur- ther explored in Chapter 2 under Pathway III: Ensuring a sus- tainable growth pattern. 7 World Bank. 2023. Cambodia Country Climate and Development Report. CCDR Series. © Washington, 25 DC: World Bank. http://hdl.handle.net/10986/40467 License: CC BY-NC-ND 3.0 IGO. 1.3 Update on reducing extreme poverty and boosting shared prosperity C ambodia’s economic growth continued to deliver sustained and broad-based reductions in poverty prior to the onset of the COVID-19 pandemic. Cambodia’s national poverty rate fell by 8.5 percentage points from 26.3 percent in 2014 to 17.8 per- cent in 2019/20 (Figure 6), amounting to 1.2 million Cambodi- ans escaping poverty. Impressively, the pace of poverty reduc- tion accelerated, falling by about a third over these five years compared to about a fifth during the preceding five years. FIG. 6 Progress on reducing extreme poverty since the SCD1 and key drivers Poverty rate by region Food poverty rate by region Percent of population Percent of population 2009 2014 2019/20 . % . % . % 43% 43% 21% . % 22% . % 25% . % 32% . % . % . % 50% 50% 19% . % 22% . % . % . % . % . % . % . % . % Cambodia Urban Rural Cambodia Urban Rural Real income by source, sector and type of employment Riels per person per day (2019/20 prices) 2014 2019/20 66% , 63% , 24% , 25% 6% 126% , , , , , , Public Other non-labor Remittances Agricultural Agricultural Non- Non- transfers income wage self-employed agricultural agricultural self-employed wage Note: Urban = Phnom Penh and other urban areas. Poverty estimates are Source: Ministry of Planning (2021); based on the revised poverty measurement methodology. Food poverty Cambodia Socio-Economic Survey is when an individual’s total consumption falls below the poverty line (i.e., (CSES) 2009, 2014 and 2019/20. cost of acquiring food that meets the nutritional requirements of 2,200 26 kilocalories per person per day).   The poverty reductions were also broad-based, falling by about a fifth to 9.6 percent in urban areas and by a quarter to 22.8 percent in rural areas. The poverty rate is lowest in the capital Phnom Penh (4 percent) and other urban areas (13 percent).8 In addition, the food poverty headcount halved to just 0.6 per- cent of the population, driven entirely by improvements in ru- ral areas. Like overall poverty, this is a 0.6% faster rate of reduction than what was achieved in the preceding five years. food poverty headcount halved Much of the poverty reduction in to just 0.6 percent of the population, this pre-COVID period was driven driven entirely by improvements in by employment shifting to non- rural areas farm activities paired with grow- ing non-farm wage earnings. While the poverty rate in rural areas remains double the rate in urban areas (Figure 6), much of the reduction in Cambodia’s national poverty rate is being driven by outmigration from rural to urban areas, where growth and opportunities are more concentrated. Manufacturing, construction, and services in urban areas at- tracted poor rural residents, offering higher and faster-growing wages. Real non-farm earnings increased substantially in the five years preceding the pandemic (Figure 6), with average wages rising by 66 percent and average self-employed income rising by 63 percent. Most garment and footwear jobs, employ- ing women mostly, are paid at least the minimum wage and offer a range of monetary and non-monetary benefits. From 2014 to 2023, the minimum wage, applicable only to garment and footwear industries, was raised nine times, increasing from US$100 in 2014 to US$200 in 2023. In contrast, earnings in the agricultural sector grew relatively slower in the five years preceding the pandemic, with self-employed landowners ex- periencing strong income growth (24 percent), while worker wages fell by 6 percent in real terms. There were also minor contributions to poverty reduction from growth in remittances and public transfers, albeit off relatively low bases. Cambodia’s economic growth also boosted shared pros- perity, with a broad-based acceleration in consumption growth and only modest increases in income inequality (mainly in rural areas). Cambodia’s growth model supported an acceleration in consumption growth over the past five years (Figure 7), for both low- and high-income groups across both urban and rural areas, genders, and major geographic regions of the country. Growth has benefited the poor and vulnerable, with the real consumption of the poorest 40 percent of the 8 Cambodia population increasing to 2.7 percent per annum between 2014 Ministry of Planning (2021). and 2019/20 – about a third faster than during the preceding five years. Moreover, in urban areas, the income growth of the poorest 40 percent of households continued to grow faster 27 FIG. 7 Progress on boosting shared prosperity in Cambodia since SCD1 Consumption growth by income group Income inequality by population and population characteristics, characteristics Gini coefficient Annualized growth, Percent 2009-14 2014-19/20 2014 2019/20 3% 76% 9% 68% 73% 8% 7% 57% . % . % . % Top 7% . % 60% 19% by . % . % . % . % income . % . % 30% 35% 36% 33% 29% Bottom . % . % . % . % . % 40% . % . % . % . % . % by income Cambodia Urban Rural Female Male Cambodia Urban Rural Female Male Note: Urban = Phnom Penh and other Source: Cambodia urban areas. Poverty estimates are Socio-Economic Survey based on the revised poverty measure- (CSES) 2009, 2014 and ment methodology. 2019/20. than for the richest 60 percent (2.7 percent vs. 1.9 percent per annum). However, the consumption growth of the top 60 per- cent of rural households accelerated more over the same peri- od (up 57 percent to 3.3 percent per annum). This more rapid consumption growth at the top end of the income distribution led to a small increase in income inequality in rural regions of Cambodia, which in turn elevated the national Gini coefficient. Cambodia’s robust economic growth also drove strong improvements in economic mobility. The SCD1 noted that the share of economically secure (emerging consumer class) and the middle class in Cambodia had barely increased in re- cent decades due to: (i) low household endowments of human capital (education and health) and physical assets (land); (ii) high exposure to shocks, especially health and extreme weath- er, combined with limited spending on social protection; and (iii) limited job opportunities outside the garment sector. How- ever, new analysis reveals that upward economic mobility has accelerated in Cambodia (Figure 8). The share of the econom- ically secure population grew by 11 percentage points to 67 percent in the five years preceding the pandemic. Meanwhile, the share of the economically vulnerable or poor population 28 has declined by 11 percentage points to 33 percent. Nonetheless, Cambodia’s poverty reduction progress remains susceptible to shocks and constrained by lim- ited social protection. The COVID-19 pandemic highlighted how quickly vulnerable households can fall into poverty and be pushed into suboptimal food and education choices.9 The pandemic led to the poverty rate rising by an estimated 2.8 per- centage points in 2020, pushing around 460,000 individuals into poverty.10 About 15 percent of Cambodians had incomes only marginally above the poverty line prior to the pandemic.11 Near- poor households did not differ substantially in characteristics to poor households. Household savings were low, limiting house- holds’ means to cope with shocks, let alone to endure months of hardships from the negative income effects of the pandemic followed by rapid increases in food and energy prices and floods in 2022. Poverty likely rose in 2021 from the pre-pandemic level due to the lower GDP growth rates, persistent headwinds in the services sector, one of Cambodia’s main growth drivers ac- counting for about 4 in 10 jobs, and lockdowns. However, the pandemic significantly accelerated the de- velopment of Cambodia’s nascent social protection sys- tem. Spending on cash transfers increased rapidly from less than 0.1 percent of GDP in 2019 to 1.4 percent in 2021, primarily due to the launch of a new emergency assistance program in 2020 that delivered monthly cash payments to registered FIG. 8 Progress on economic mobility since the SCD1 Economic mobility in Cambodia Share of population by group, Percent (change in ppt) % Economically secure . % Near . % poor . % . % 11 ppt . % Poor . % 2 ppt . % . % . % 9 ppt 2009 2014 2019/20 Source: Cambodia Socio-Economic Survey (CSES) 2009, 2014 and 2019/20. Note: Near-poor households are those whose daily per capita consumption lies between 1 and 1.25 times the national poverty line. Economically secure households are those whose daily per capita consumption is above 1.25 the national poverty line. 9 COVID-19 Household Monitoring 10 World Bank (2022). 11 Near-poor households site for Cambodia (https://www. Cambodia Poverty are those whose daily per worldbank.org/en/country/cambodia/ Assessment. capita consumption lies brief/monitoring-the-impact-of-covid- between 1 and 1.25 times the 29 19-on-households-in-cambodia). poverty line. IDPoor households.12 These efforts alleviated the adverse pan- demic effects on welfare and food security, initially benefit- ing 700,000 households and 2.8 million individuals (17 percent of the population). Reflecting a growing recognition of social protection to the country’s development, the Cambodian gov- ernment’s latest medium-term plan (the Pentagonal Strategy – Phase I – 2023-2028) has upgraded this area to one of the six key development priorities, with a focus on institutionalizing a national social protection system for poor, vulnerable and at-risk households that can address both economic and other crises. Important reforms have been initiated in 2023 to ad- dress some of these challenges, including the recent approval of a Shock Responsive Social Protection Framework (SRSP) by the Council of Ministers and plans to roll-out Family Pack- age integrated cash targeted to poor households in the first quarter of 2024.13 12 The Identification of Poor Households Program 13 The SRSP Framework outlines predefined (IDPoor) is the Government of the Kingdom of adjustments for Social Protection programs in times Cambodia’s mandatory standard tool for targeting of shock, while the Family Package will target pro-poor measures in the country. It provides IDPoor 1 and 2 households providing a base benefit regularly updated information on poor and at-risk and additional benefit amounts by beneficiary households. category: (i) pregnant women and children under 2; school-aged children; elderly; persons with 30 disabilities; and people living with HIV and AIDS. Chapter 2 Assessment of progress on SCD1 priorities 2.1 Summary of progress 2.2 Pathway I: Increasing economic competitiveness and diversification 2.3 Pathway II: Building human assets 2.4 Pathway III: Ensuring a sustainable growth pattern 2.5 Cross Cutting IV: Public sector reform 2.1 Summary of progress M ost pathways identified in SCD1 made moderate progress in the past five years, except for building hu- man assets (Pathway II), which re- corded only modest gains. Pathway I’s moderate progress (Figure 9) was driven by strong export product diversification and modest improvements in competitiveness.14 Pathway III’s moderate progress was driven by declining risk exposure, moderate en- vironmental performance gains, and improved urban develop- ment. Strong improvements in government effectiveness and the rule of law drove Cross-cutting IV’s moderate progress. In contrast, Pathway II’s modest progress was driven by mixed improvements in health, education, and social protection. De- spite this progress, challenges remain on most pathways, with Cambodia ranking towards the bottom of its peers on most in- dicators and in the bottom two quintiles globally. Progress on the ten areas for development outlined in the SCD1 were mixed (Figure 10). There was strong prog- ress on reducing firm costs (development area 1), with reduc- tions in business registration, logistics and electricity costs.15 There was moderate progress on public sector reform (area 10), led by successful public financial management (PFM) re- forms that significantly increased domestic revenue mobiliza- tion and created more fiscal space to invest in priorities such as education, health, social protection, and climate change. In skills development (area 5), investing in the early years (area 6) and social protection (area 7), progress was modest, with success in some areas (e.g., lifting school enrollment rates, reducing child mortality, introducing cash transfer programs) offset by declines in others (e.g., falling learning outcomes, declining enrollment in early childhood education and rising out-of-pocket health expenditures). Progress was also modest on building sustainable cities (area 9), with small reductions in slums and air pollution despite limited policy progress. In contrast, progress has been weak in all other areas for devel- opment, with policy progress in most areas yet to translate into significant improvements in outcomes. 14 Note on methodology: progress at the pathway level is assessed based on Cambodia’s performance on the desired outcomes relative to structural peers. Hence, the progress on the pathways is independent of the progress on the areas for development under the pathway (i.e. not an average of the progress on the areas). 15 Note on methodology: progress on the areas for development is assessed based on Cambodia’s performance on the desired outcomes relative to structural peers. Hence, while policy changes in these areas 33 are monitored and acknowledged, policy changes in and of themselves do not determine the rating. FIG. 9 Progress on pathway outcomes since SCD1 Legend for progress since SCD1: Strong Moderate Modest Weak Poor Improve- ment vs. Latest Change in global structural rank vs. Global Progress on pathways ranking since SCD1 peers peers quintile I. Increasing Export concentration economic 1st / 8 4th / 8 2nd / 5 +42 competitiveness & diversification Global competitiveness to sustain strong +3 3rd / 8 6th / 8 4th / 5 growth & create jobs II. Building Human Development human assets +3 4th / 8 7th / 8 4th / 5 to facilitate economic mobility and shared prosperity III. Ensuring Environmental Performance 5th a sustainable 2nd / 8 3rd / 8 +5 (last) growth pattern by investing World Risk Index (WRI) x in natural +16 capital, climate 1st / 8 7th / 8 4th / 5 resilience, and sustainable urban development IV. Cross- Government Effectiveness cutting: 1st / 8 4th / 8 4th / 5 +10 Governance and public sector Rule of Law capacity 5th +7 1st / 8 5th / 8 (last) Control of Corruption 5th +3 2nd / 8 7th / 8 (last) Regulatory Quality -5 6th / 8 5th / 8 4th / 5 x Note: For World Risk Index (WRI)), a higher ranking Source: World Bank staff implies higher risk (a worse outcome), while a lower ranking analysis based on various 34 implies a lower risk (a better outcome). sources.* “Progress was also modest on building sustainable cities (area 9), with small reductions in slums and air pollution despite limited policy progress” 35 FIG. 10 Progress on areas for development since SCD1 Key constraint to growth & twin goals from SCD1: Highest High Modest Progress since SCD1: Strong Moderate Modest Weak Poor Progress on Pathways Areas for development Progress and their SCD1 priority ratings I. Increasing economic 1. Reducing the costs of firm establishment and operation competitiveness and (including business environment, informal fees, trade Strong facilitation, electricity costs) diversification to sustain strong growth and create jobs 2. Boosting public and private investment in infrastructure and Weak machinery acquisition while developing capital markets 3. Strengthening regulation and supervision of the financial sector to mitigate risks from strong credit growth, while Weak building further financial inclusion 4. Fostering agricultural modernization in the aftermath of the commodity price boom Weak II. Building human 5. Endowing people with skills by boosting attainment and Modest learning outcomes of secondary and higher education assets to facilitate economic mobility and shared prosperity 6. Investing in the early years (nutrition, pre-primary education) Modest 7. Protecting households from shocks (OOP in health, DRM, social protection) Modest III. Ensuring a 8. Maintaining and developing natural capital, while Weak strengthening climate resilience sustainable growth pattern by investing in natural capital, climate 9. Promoting competitive, sustainable, and inclusive cities through integrated urban planning Modest resilience, and sustainable urban development IV. Cross-cutting 10. Public administration and public financial management Moderate reforms for improved service delivery Source: World Bank staff analysis. 2.2 Pathway I: Increasing economic competitiveness & diversification T he moderate progress on Pathway I was driven by strong export product diversifi- cation and modest improvements in glob- al competitiveness.16 SCD1 highlighted that a lack of economic diversification in export prod- ucts, markets, and factor inputs was a risk to Cambodia’s future economic development. Specifically, the SCD1 noted that an excessive concentration of exports in gar- ments and weakening external competitiveness could risk a slowdown in the growth of exports and hurt future growth, poverty reduction, and economic inclusion of women. This risk has not yet materialized, with Cambodia making more prog- ress on reducing its export product concentration than any of its structural peers (Figure 11). This diversification was driven by strong growth and growing global market shares in more complex products such as travel goods and electronics. Cam- 16 See more bodia also improved its relative global competitiveness rank- details and analysis on the ing by three places, a greater improvement than most peers. progress of Pillar 1 in Chapter 3 However, this improvement disguised mixed progress, with of Background advancements on ICT adoption and infrastructure offset by Paper: SCD2 Cambodia 2023. domestic competitiveness and innovation capability reversals. FIG. 11 Progress on key Pathway I outcomes since SCD1 WEF global Export Concentration Index competitiveness ranking Change in index score between Change in ranking between 2017 2016 and 2021, 2021 score and 2019; 2019 ranking 67 Vietnam 32 Philippines 64 Philippines 24 Nicaragua 106 Cambodia Thailand 7 40 Thailand Guatemala 13 Bangladesh 105 Bangladesh 13 Guatemala 98 Vietnam 16 Nicaragua 109 Myanmar 23 Myanmar* 131 Cambodia 21 Source: WB staff calculations using data from the World Economic Forum’s Global Competitiveness reports; and United Note: No recent data for Myanmar. Nations Conference on Trade and Development UNCTAD); and 37 Last ranking from 2014. The Growth Lab at Harvard University. These developments reflect diversification in some as- pects of Cambodia’s growth process. Cambodia made the most progress on export product diversification, with the share of garments in total goods exports declining from 66 to 46 percent between 2016 and 2021 (Figure 12). Other products are now driving overall export growth, including relatively adja- cent products such as footwear and travel goods and more ad- vanced products such as bicycles and electronics. Travel goods (which include items such as suitcases, handbags, and sports bags) have been the standout performer in recent years, with its share of Cambodia’s exports jumping from 1 to 9 percent and its global market share increasing to 2 percent. The growth in travel goods exports has been primarily driven by exports to the USA and followed a 2016 decision by the US govern- ment to expand its Generalized System of Preferences (GSP) to travel goods, which prompted FDI into this sector in Cam- bodia. Cambodia has also experienced minor investment di- versification progress, with the combined share of foreign cap- ital (Overseas Development Assistance or ODA and Foreign Direct Investment of FDA) declining slightly, commensurate with rising domestic investment. However, Cambodia has be- come more dependent on investment from China, whose share of FDI jumped from 36 percent on average between 2012-16 to 50 percent between 2017-21. In contrast, export market di- versification has gone backward, with the combined share of the EU, UK, and US rising from 61 to 66 percent, albeit with a pivot from the EU to the US. The US share of exports rose from 21 to 43 percent between 2016 and 2021, while the EU 17 European and UK share fell from 40 to 23 percent over the same period. Commission (12 August 2020); Total exports to the EU have been declining in absolute terms Cambodia loses since 2020, following the withdrawal of preferential duty-free duty-free access to the EU market and quota-free access treatment over human rights concerns over human rights concerns. (demonstrating the risks of concentration).17 Shares to most other markets— including across Asia—declined, except for 38 China, which rose from 6 to 9 percent. FIG. 12 Progress on diversifying growth-generating process Goods exports by product Goods exports by market Share of total, Percent Share of total, Percent Other 17% 28% Other 16% 13% Bicycle ASEAN 3% & Japan 13% 17% Electrical 4% machinery 8% 4% China 9% & equipment 6% EU & UK 6% 66% 8% 40% Footwear US 9% 23% Travel 46% goods 43% Garments 21% 2016 2021 2016 2021 Investment by source GFCF, Share of total, Percent Other 31% 34% ODA 16% 19% FDI 53% 47% 2016 2021 A key enabler of improved Pathway I outcomes was the reduced administrative burden imposed on firms (development area 1). The COVID-19 pandemic increased the urgency of supporting businesses and digitalizing govern- ment-to-business procedures, which helped accelerate efforts to reduce the cost of firm establishment and operation (Fig- ure 13). For example, Cambodia’s business registration pro- cess was significantly simplified and almost fully digitalized in 2020 through a single, integrated online portal, enhanced in speed (down to 8 days) and costs (reduced by nearly 60 per- cent). In addition, logistics costs fell by 20 percent between 2015 and 2020, supported by the establishment of a National Single Window and National Logistics Council as well as the abolishment of several state agencies that had regulated (and increased the complexity of) cross-border trade (e.g., Cam- control and Kamsab). Finally, electricity prices for industrial users fell by 18 percent between 2017 and 2022 following the 39 implementation of tariff reforms. Despite these improvements, FIG. 12 Progress on diversifying growth-generating process (cont.) Non-garment . manufactured exports USD billions . P. A. % + . . . . . . . . . . . . . . . . . Travel goods . Bicycle . . . . . Footwear . . Electrical machinery . & equipment . . Other Cambodia’s share of selected global exports Percent of total world exports 6.0 5.5 BICYCLES 5.0 4.5 2.0 TRAVEL GOODS GARMENT 1.5 1.0 FOOTWEAR 0.5 0 2017 2018 2019 2020 2021 Source: World Integrated Trade Solution and the United Nations Conference on Trade and Development many firms' costs remain relatively high compared to struc- tural peers and other countries in East Asia. In addition, com- pliance with licensing and permit requirements also remains a significant burden for businesses, made more difficult by a lack of digitalization. Finally, the broader enabling business en- vironment in Cambodia is also not conducive to firm productiv- 40 ity and competitiveness with issues around: (i) corruption and challenges with the enforcing the rule of law; (ii) a high degree of informality; (iii) anticompetitive practices; and (iv) an insol- vency and debt resolution regime that is not fully functional and outdated. However, progress on boosting investment in infrastruc- ture (area 2) was weak, with policy reforms and higher in- vestment rates yet to translate into improved outcomes. Policy reforms: The government made significant progress on modernizing laws aimed at boosting public and private invest- ment in infrastructure and machinery, including (i) approving a new PPP Law in 2021; (ii) establishing a range of schemes to support firms affected by the COVID-19 pandemic and to promote investments in machinery, export, and innovation; and (iii) taking steps to develop Cambodia’s capital markets. Investment levels: Cambodia has also made progress in in- creasing the gross fixed capital formation level from around 21 to 24 percent of GDP since the SCD1 (Figure 14). Government investment in non-financial assets was a significant contributor, increasing from 6.8 to 10.9 percent of GDP. However, much of Cambodia’s investment is in construction and real estate, with only about 17 percent of private credit flows going into infra- structure, manufacturing, and agriculture.18 Hence, Cambodia's FIG. 13 Progress on reducing firm costs (area 1) Cost of starting a Cost of logistics by country Cost of electricity to business by country (2020, unless otherwise industrial users by country (2019, unless otherwise specified); Share of GDP $ per kW hour specified); Share of income (percent) per capita (Percent) Nicaragua % Cambodia (2015) % Cambodia (2017) . Cambodia (2019) % Cambodia (2020) % Phillipines . 20% Cambodia (2020) % Indonesia % Cambodia (2020) . 58% 18% Phillipines % Vietnam % Lao PDR . Guatemala % Thailand % Thailand . Myanmar % Malaysia % Singapore . Bangledesh % Singapore % Malaysia . Vietnam % Vietnam . Thailand % Source: Doing Business 2020. For the Cambodia 2022 measure, staff calculations based on government 41 reported fees. NESDC 2021; and Banomyong and Varadejsatitwong, forthcoming. overall infrastructure investment gap remains high with pub- lic investments in infrastructure during 2019-2022 accounting for only 3.2 percent of GDP, while estimated annual financing needs by 2040 are about 10 percent of GDP.19 In addition, capital markets remain nascent and underdeveloped; the first corporate bond issuance occurred in 2018 and the first govern- ment bond issuance in 2022. Finally, the number and volume of PPPs in Cambodia is relatively low compared with benchmark countries, with only 7 PPP projects worth USD 1.3 billion closed in Cambodia between 2017 and 2022, well below peers such as Vietnam (62 projects worth USD 24 billion) and Thailand (18 projects worth USD 10 billion).20 Infrastructure: Progress has been made in improving the country’s main national road corridors (Figure 14). However, significant gaps remain on the condition and resilience of the secondary network, especially on provincial and rural roads. In addition, while Cambodia has been one of the fastest elec- trifying countries, major investments are needed to support grid enhancement, reduce system losses and costs, absorb the planned scaling-up of variable renewable energy, and catalyze investments in energy-efficient technologies.21 Finally, Cam- bodia made significant progress in improving its telecommu- nications infrastructure between 2016 and 2022 (Figure 14), but still lags behind most ASEAN peers. For example, access to fixed broadband remains one of the lowest in East Asia, with some of the lowest speeds and highest costs. This hin- ders the development of digital businesses, which also remains amongst the lowest in the region.22 18 NBC 19 World Bank 20 Private 21 Electricity 22 World Bank Credit Granted 2023, Cambodia Participation in Authority of (2023). East by Banking PIP 2021- infrastructure Cambodia, 2021. Asia and the Institutions 2023; Global (PPI) Database, Pacific Economic Classified by Infrastructure World Bank. Update: Services Industry 2023 Hub and Oxford for Development. 42 Economics 2016. FIG. 14 Progress on boosting investment in infrastructure (area 2) Gross capital formation Telecommunication Cambodia’s Road Network (% of GDP, period average) Infrastructure Pavement rate (Percent) (2017-21, unless otherwise Index, 2022 specified) 2022 2017 Vietnam % Thailand . National (1 digit) 100% 100% Myanmar % Vietnam . National (2 digit) 73% Bangledesh % Indonesia . 70% Thailand % Cambodia (2022) . 125% Provincial 38% Cambodia (2017-21) % Loa PDR . 15% 30% Phillipines % . Cambodia (2016) Rural 10% Nicaragua % 5% Cambodia (2012-16) % Total 29% 22% Guatemala % 17% Source: World Bank staff estimates based on data from WDI (2021); MPWT and MRD (2023); and UN DESA (2022). Similarly, progress on strengthening financial sector su- pervision and inclusion (area 3) was weak, with signifi- cant policy reforms yet to translate into major improve- ments in outcomes. → Financial stability: In 2019, a National Committee for Finan- cial Stability was established to strengthen inter-agency col- laboration, and regulators enacted the full adoption of the In- ternational Financial Reporting Standards. In 2020, the NBC: (i) revamped the Banking Supervision General Department; (ii) commenced liquidity and capital ratio stress testing; and (iii) initiated a deposit protection scheme (but did not opera- tionalize it). In February 2023, Cambodia was removed from the Financial Action Task Force (FATF)’s list of jurisdictions under enhanced monitoring (the ‘grey list’) after verifying all requisite strategic AML/CFT remedial actions. However, bank lending to the private sector still grew at over 20 percent per year since the SCD1, resulting in outstanding private sector credit more than doubling from 87 to 182 percent of GDP be- tween 2017 and 2022.23 Domestic credit to the private sector is now the second highest in the region after China, which – combined with a growing concentrated of credit in real estate related sectors– poses risks to macro-stability. → Financial access and inclusion: In 2017, the NBC established a mechanism to strengthen financial consumer protection. The NBC has also strengthened its capacity as overseer and oper- ator of the National Payments System (NPS) and has been ac- tively developing new innovative payment systems.24 In 2020, as part of its pandemic response, the government established the Small and Medium Enterprise Bank of Cambodia (SMEBC) and the Credit Guarantee Corporation of Cambodia (CGCC) to help increase SME’s access to financing. Financial inclusion has im- proved (but continues to lag structural peers), with the share of Cambodians with a transaction account rising from 22 to 33 per- cent between 2017 and 2022 (Figure 15). Further, account own- ership is significantly lower in rural areas as well as among the poor and less educated. In addition, only 26 percent of the adult population made a digital payment in 2021, well behind Thailand and Vietnam. Women continue to face greater disadvantages in growing their business: over two-thirds of approximately 10,000 formal women-owned SMEs in Cambodia are unable to obtain 23 World loans from financial institutions, leaving a financing gap of USD Bank World Development 170 million per year. Closing this gap could increase per capita Indicators. income by approximately 12 percent by 2030 as more capital 24 Including the Cambodian becomes available to women entrepreneurs. In addition, Cam- Shared Switch, bodia remains one of the few countries that does not have a Retail Pay, and Bakong. fully operational Real-Time Gross Settlement System (RTGS), although the NBC is considering leapfrogging digital technology in the national payment and settlement system. 44 FIG. 15 Progress on key financial sector indicators (area 3) Domestic credit to private sector Adult population with bank Share of GDP (%), 2022 transaction account Share of population aged 15+ (2021, unless otherwise stated) China % Thailand % Cambodia (2022) % Vietnam (2022) % 109% Thailand % Bangledesh % Malaysia % Phillipines % Vietnam % Myanmar % Cambodia (2017) % Guatemala (2022) % Lao PDR % Cambodia (2021) % 50% Philippines % Nicaragua % Indonesia % Cambodia (2017) % Source: World Bank, World Development Indicators; World Bank (2023), East Asia and the Pacific Economic Update: Services for Development; and World Bank Global Findex 2021. Finally, there has been little movement on the agricul- tural policy agenda and limited modernization (area 4). Cambodia primarily remains a raw material supplier, with lim- ited investments in farm mechanization, which could potential- ly increase yields, and with limited investments in downstream processing and agri-food, which could increase domestic value addition and create higher quality jobs. In addition, the po- tential benefits from new free trade agreements (e.g., China, Korea) have yet to materialize and strong job opportunities in urban areas limit the policy focus on agriculture. Against this backdrop, most policy ideas outlined in SCD1 were either delayed in implementation or not fully operationalized. Despite this policy inertia, there has been small, albeit steady, progress on key indicators of agricultural modernization (Figure 16), al- though Cambodia continues to lag most structural peers. For example, the share of processed food exports (relative to total food exports) has increased by a third to 8 percent and the machinery-to-worker ratio has increased by 28 percent. Other bright spots include: (i) mutual benefits from creating mar- ket linkages by facilitation cooperation between private sector companies and producer groups and cooperatives; (ii) increas- ing contract farming, which is producing good results, albeit for a small number of farmers; (iii) an emerging agri-food pro- cessing sub-sector; and (iv) improved access to finance (E.g., via the established of “Khmer Enterprise” and strengthening of the SME Bank to provide emergency assistance during the 45 COVID-19 pandemic. FIG. 16 Progress on agricultural modernization indicators (area 4) Processed food exports Farm machinery per worker Share of total food exports, 1000 CV* per 1,000 agricultural workers, Period average from 2017-2020 (Percent) Period average from 2017-2020 Thailand % Philippines , Philippines % Thailand , % Vietnam , Vietnam Bangladesh Guatemala % Myanmar Nicaragua % Cambodia 28% Cambodia % Cambodia (2012-16) 33% Cambodia (2012-16) % Nicaragua Myanmar % Guatemala Source: World Integrated Trade *Measured in thousands of metric horsepower (1000 CV) Solution (WITS). in tractors, combine-threshers, and milking machines. 2.3 Pathway II: Building human assets T he modest progress on Pathway II was driven by the only minor improvements in human assets amidst the challenges of the COVID-19 pandemic.25 The SCD1 found that exposure to health and environmental shocks compounded the challenges of building human assets and achieving economic mobility, especially in the con- text of relatively nascent universal health coverage (UHC) and social assistance programs that provided limited social pro- tection. Before 2015, for example, Cambodia spent less than 0.1 percent of its GDP on social assistance—one of the lowest figures in the world and much lower than comparator coun- tries. The COVID-19 pandemic further complicated efforts to address these issues, putting massive strains on the health system, forcing about 90 percent of poor households to re- duce food consumption to cope with the negative effect on household income26, and resulting in the full or partial closure of schools for around 530 days (around one and a half years) between 2020 and 2022. In conjunction with other natural di- sasters, however, the pandemic highlighted the importance of including prevention and control of pandemic risks in growth strategies and building a shock-responsive social protection system. Against this challenging backdrop, Cambodia improved its Human Development Index (HDI) ranking by three plac- es between 2015 and 2021 (Figure 17), behind top improvers Bangladesh and Thailand, but continues to rank poorly (146th in the world on the HDI)—the lowest rank among its struc- tural peers—and significantly behind neighbors Thailand (66th) and Vietnam (ranked 115th). Cambodia is also ranked towards the bottom of its structural peers on the Human Capital Index (HCI). Finally, ranks 92nd on the Global Gender Gap index 2023, behind Vietnam (72nd) and Thailand (74th).27 Finally, the UN’s Sustainable Development Report, while noting moderate im- provements, rates Cambodia as “major challenges remaining” on SDG3 (Good Health and Wellbeing), SDG5 (Gender Equal- ity) and SDG6 (Clean Water and Sanitation) as well as “signif- icant challenges remaining” on SDG4 (Quality of Education). 25 See more details and analysis on the progress of Pillar 2 in Chapter 4 of 26 Karamba, R. Wendy; Background Paper: SCD2 Tong, Kimsun. Salcher, Cambodia 2023 which Isabelle. Monitoring the 27 Global Gender Gap is designed as a detailed Impact of COVID-19 on Report, 2023, World 47 compendium for this report. Households in Cambodia. Economic Forum FIG. 17 Progress on key Pathway II outcomes since SCD1 Human Development Index (HDI) ranking Change in ranking between 2015 and 2021; 2021 ranking 129 Bangladesh 66 Thailand 115 Vietnam 146 Cambodia 126 Nicaragua 149 Myanmar 116 Philippines Guatemala 135 Human Capital Index (HCI) Score, 2020 VIETNAM . THAILAND . PHILIPPINES . NICARAGUA . CAMBODIA . BANGLADESH . GUATEMALA . Source: Human Development Report, 2021/22 (UNDP); Human Capital Index, 2020 (World Bank). On endowing people with skills (area 5), there were mod- erate advancements on access to education. There have been encouraging improvements in lifting enrolment rates at all levels of schooling over the past decade (between 2009 and 2019/20), especially in secondary schools (Figure 18). En- rollment rates rose by 8 percentage points in primary schools (to 90 percent), by 16 percentage points in lower secondary schools (to 47 percent) and by 13 percentage points in upper secondary schools (to 30 percent). Promisingly, the poor, girls, and rural areas have driven much of the progress. Despite this progress, net enrollment in primary school remains the lowest among structural peers, with roughly 10 percent of children still not enrolled. At higher levels of education, enrollment in public technical and vocational schools (TVET) more than doubled to around 40,000 students – albeit off a low base - driven by the opening of 14 new Ministry of Education Youth and Sport (Mo- EYS) (raising the total to 18) and a broadening of the number of skills covered from four to ten. In higher education, enroll- ment decreased slightly to just over 200,000 but a higher share of students showed interest in STEM-related majors (Science, Technology, Engineering and Mathematics), which accounted for 31 percent of enrollments in bachelor's degrees. Overall, 28 ILOSTAT however, gross enrollment in tertiary education in Cambodia (2022). (13 percent), remains the lowest amongst structural peers, and significantly behind neighbors Thailand (14 percent) and Viet- 48 nam (35 percent).28 FIG. 18 Progress on access to schools and outcomes (area 5) Net enrollment by school Net primary enrollment Lower secondary level in Cambodia Percent rate (%, 2020 or latest completion rate of population available) (%, 2020 or latest available) 100 10% RY Vietnam Vietnam 90 PR IMA % % 80 Thailand % Bangladesh % 70 Philippines % Thailand % 60 % 52 50 RY ER DA Nicaragua % Philippines % W N 40 LO ECO S 30 Bangladesh % Nicaragua % 7 7% 20 RY Guatemala % Cambodia % P ER NDA UP CO 10 SE 0 Cambodia % Guatemala % 2009 2019/20 Cambodia National Learning Assessment Meeting proficiency Min proficiency in (Grade 6) Change in results between 2016 for end of primary PISA-Dy; Share of and 2021 (SDG4)X; Share of 5th 15-year-olds, 2018 graders, 2019 Advanced Proficient Basic Below basic Math Math % % % % % % % . PP % % T % 2016 2021 Reading % % Reading % % % % % % % . PPT % 2016 2021 X = SEA-PLM = Southeast Asia Primary Learning Metrics Y = PISA-D = Programme for International Student Assessment for Development Source: World Bank staff estimates based on CSES 2009 and 2019/20 (note: due to data quality concerns, data from the 2014 survey are not shown); Report on Education Congress Data (2023); Ministry of Education 49 Youth and Sports or MoEYS (2021); and Education in Cambodia: Results from Participation in the SEA-PLM. Unfortunately, increasing access coincided with declin- ing outcomes, with a lack of basic foundations making it harder to achieve proficiency at higher levels of school- ing. National tests for sixth graders reveal large increases in the proportion of students who don’t meet the basic standard for math and reading between 2016 and 2021 (Figure 18). There was a 24-percentage point increase (from 49 to 73 percent) in the proportion of students who lack basic math skills and a 15-percentage point increase (to 49 percent) in the proportion of students who lack basic reading skills and effectively can- not read (from 34 to 49 percent). Inversely, only 20 percent of sixth graders meet the proficiency standards (or above) for math, and only 33 percent meet the standards (or above) for reading. Since learning is cumulative, many of these children will go on to struggle in secondary school (if they even choose to enroll) and most will never be able to develop the more ad- vanced skills needed for innovative manufacturing and sophis- ticated services—the productivity-boosting economic activities that could propel Cambodia’s economic development.29 Indeed, international tests indicate that only a small share of Cambo- dian students meet minimum proficiency standards in reading and math—and underperform most peers especially neighbor- ing Vietnam and Thailand—and that they fall further behind as they progress from primary to secondary school (Figure 18). Poor learning outcomes stems from a combination of in- adequate teacher training, poor infrastructure, and gov- ernance issues—all of which was exacerbated by the COVID-19 pandemic. A significant part of the recent decline in learning outcomes in schools was the result of extensive school closures during the COVID-19 pandemic, which is esti- mated to have reduced to have reduced learning-adjusted years of schooling (LAYS) by 1.5 years from than the pre-pandemic baseline of 6.8 years (a 22 percent decline).30 In addition to the impact of COVID-19, a shortage of well-trained teachers and classrooms in schools and generally poor school infrastructure as well as a lack of school-based management have also under- mined learning outcomes, especially for marginalized groups. In TVET, there has been no progress on granting institutions more 29 World Bank autonomy, a reform that would help improve quality. Howev- (2023). Fixing the Foundation: er, the Cambodia Garment Training Institute (CGTI) was cre- Teachers and ated by the Garment Manufacturers Association of Cambodia Basic Education in East Asia and (GMAC), with promising initial results that could provide a good Pacific example for the emergence of more industry-led training institu- 30 World Bank (2021). Learning- tions. In higher education, progress was made on granting great- adjusted years of schooling capture er autonomy to institutions, which is expected to lift quality in the both the quantity years ahead, and there are signs that the quality of tertiary grad- and quality of schooling for the uates and research capabilities have improved. However, no re- average student. cent large-scale tracer study was conducted to measure recent graduates’ performance and rates of return to higher education. 50 FIG. 19 Progress and drivers of lower secondary enrollment in Cambodia (area 5) Net enrollment rate at lower secondary schools in Cambodia Percent 2009 2019/20 By region By gender By geographic area By poverty status 7% 55% 58% 61 61 15% 52% 45% 67% 55% 57 126% 30% 39% 52 52 52 52 51 47 45 45 45 43 43 43 31 33 31 33 31 33 27 29 19 National Urban Rural Girls Boys Phnom Plains Tonle Sap Coastal Plateau & Non-poor Poor Penh moun- tains Main reason for not being enrolled in lower secondary school Share of total children ages 12-14 not enrolled in school (%), 2019-20 Other Must help at home Not interested Poor school performance Economic pressures* % % % % % % % 12% 10% 12% 7% 19% 15% 7% 7% 13% 27% 23% 20% 8% 21% 12% 24% 20% 13% 20% 22% 24% 24% 20% 24% 16% 46% 38% 37% 38% 39% 37% 33% Cambodia Urban Rural Boys Girls Non - poor Poor By Region By Gender By Poverty Status Source: CSES * ‘Must contribute to household income’ or ‘Too poor’. Note: Urban = Phnom Penh and other urban areas 2019-20 In addition, progression to secondary school remains low, and dropout rates remain high—especially amongst the poor and in rural area—due to financial, perfor- mance and gender barriers. Only half of Cambodian prima- ry school graduates continue to lower secondary school and, of these, only 58 percent complete this stage, which is the one of one the lowest completion rates amongst structural peers.31 A deeper analysis of lower secondary schools (Figure 19) indi- cates that enrollment rates are lower than the national average among the poor (43 percent compared to 61 percent for the 31 Sustainable non-poor) as well as in rural areas, among boys and in re- Development gions outside the capital. Moreover, enrollment rates in Phnom Report 2022 (United Nations). Penh, while still the highest, have fallen by 15 percent over the past five years. Similar patterns are also observed at the upper 51 secondary school level. The most cited reason for children of lower secondary school age not attending school is economic pressures, with 38 percent of students (and 46 percent offi- cially classified as poor) citing a lack of funds or the need to work to contribute to household income.32 The second most cited reason is poor school performance (22 percent), which in part stems from the lack of basic foundations in literacy and numeracy provided at primary school. In addition, gender bar- riers and stereotypes appear to be significant factors. For girls, the need to help with chores at home and “other” reasons are significantly higher than for boys. Economic pressures, poor performance and a lack of motivation are considerably higher for boys than for girls. These findings highlight the importance of addressing financial and gender barriers to schooling as well as investing greater resources to help underperforming chil- dren, including those impacted by COVID-19 and/or who did not master the basic foundations in primary school, to catch up to their peers. The net result of low secondary school completion and poor learning outcomes is that the current and emerg- ing Cambodian workforce remains predominantly low- skilled. There has been little progress on overall upskilling 32 World Bank (2022). since the SCD1 (Figure 20), with the share of the workforce Cambodia that has completed secondary education and/or been admit- Poverty Assessment. ted to college standing at only 17 percent in 2019/20; essential- FIG. 20 Overall progress on upskilling Cambodia’s workforce since the SCD1 (area 5) Highest level of education of the Classification of Cambodian jobs workforce by age Share of total (%) by skill level Share of total (%) College+ Secondary Complete High Skilled Medium Skilled < Secondary < Primary None Low Skilled Elementary Ocuppations % % % % % % 11% 12% 14% 14% 4% 5% 2 ppt 5% 6% 1 ppt 5% 5% 78% 6% 6% 77% 40% 41% 54% 58% 1 ppt 29% 30% 19% 18% 16% 14% 12% 12% 1 ppt 7% 4% 2014 2019/20 2014 2019/20 2014 2019/20 Total working 15 to 24 age population year-olds Source: Cambodia Socio-Economic Survey (CSES) 2014 and 2019/2020. Note: Elementary Occupations includes elementary occupations workers; Low-skilled occupations include service and sales workers, craft and related workers, and plant and machine operators and assemblers; medium-skilled occupations include technicians and associate professionals, clerical support workers, skilled agricultural, and forestry and fishery workers; high-skilled occupations include managers and professionals. ly unchanged from 2014. More concerning is that the emerg- ing future workforce does not look very different. While 15- to 24-year-old Cambodians are more likely than the total work- force to have enrolled in secondary school (58 percent com- pared to 41 percent, respectively), the vast majority drop out before completing secondary school. As a result, only 20 per- cent of 15- to 24-year-olds had completed secondary school and/or been admitted to college in 2019/20, a rate that is both largely unchanged over the last five years and only marginally better than the total workforce. In addition, Cambodia ranks towards the bottom of its peers in Asia on advanced digital skills (like using a spreadsheet or preparing slides for a pre- sentation). There is also major age divide within Cambodia on basic digital skills (like sending emails), with these skills com- monly used by young people but almost nonexistent among the working age group of 25–74-year-olds. This is relevant, be- cause it reveals the urgency of equipping current workers with the skills that are demanded today. Low school completion and skills in turn is highly correlated with the low-skill jobs that most Cambodians take.33 Overall, nine in ten Cambodian workers are in elemen- tary or low-skilled occupations and a lack of upskill- ing constrains economic upgrading. Firms report skills as the third major obstacle to their operations, with 50 percent reporting challenges in hiring34 and filling vacancies in medi- um-skilled occupations such as ‘technical and associated pro- fessionals’.35 Difficulties in hiring affect business operations, with consequences ranging from delays in developing new products and services and meeting quality standards to losing business to competitors. Employers are not fully satisfied with worker skills36 and skills are the top constraint when it comes to digitalization and technology adoption.37 A big driver of low secondary school completion is simply the high opportunity cost relative to taking a job. Cambodia has seen huge growth in low-skilled manufacturing jobs, with more than one million jobs created in garment, travel goods and footwear (GTF), and rising wages. However, the lack of investment in skills rep- resents a risk to the future welfare of Cambodians, especially as increasing wages and automation eventually start to reduce the pace of job creation in low-skilled manufacturing. Overall progress on investing in the early years (area 6) 33 World Bank has also been modest but mixed, with improvements in (2023). East Asia and the child health offset by declines in pre-primary enrolment Pacific Economic rates (Figure 21). The positive improvements on child health Update: Services for Development. outcomes were supported by better health and maternity ser- 34 World Bank. 35 National 36 Skills 37 Business 2016. Enterprise Employment Measurement Pulse Survey Survey for Agency or NEA Survey (2022). (2021) 53 Cambodia. (2018). vices, rising vaccination rates for children, and improved access to clean water and sanitation services (which is important given the burden of disease in Cambodian children is still predomi- nantly diarrheal). Overall, significant challenges remain on build- ing the human capital of future generations of Cambodians, with rates of child mortality, malnutrition and access to pre-primary education remaining poor compared to structural peers. → Child mortality: Cambodia made significant and broad-based reductions in child mortality since the SCD1. For example, na- tional data indicates that the prevalence of under-5 child mor- tality more than halved for all age groups, sexes and regions between 2014 and 2021/21, with the biggest improvements among girls and in rural areas. However, mortality remains higher in rural areas and among boys. Similar trends are also observed in infant mortality rates. Internationally comparable data indicates that the prevalence of under-5 child mortality in Cambodia declined more modestly compared to structural peers (fourth most improved) between 2016 and 2021, but re- mains relatively high (fourth highest). → Child nutrition: There were also significant and broad-based reductions in the prevalence of poor child nutrition (i.e., stunt- ing and underweight), but no movement on wasting. For ex- ample, national data indicates that the prevalence of stunting in children under-5 declined by roughly a third for all sexes and regions between 2014 and 2021/21, with the biggest improve- ments among girls and in urban areas. However, again, stunting remains higher in rural areas and among boys. Similar trends are also observed in the prevalence of children under-5 who are underweight. Internationally comparable data indicates that the prevalence of under-5 child stunting in Cambodia de- clined more modestly between 2016 and 2021 (17 percent), but was the second most improved among structural peers (after Bangladesh). However, again, stunting remains relatively high compared to peers (fourth highest). → Early childhood education (ECE): In contrast, national data indicates that there was significant setbacks in ECE enrollment in Cambodia, with the share of total children aged 3-5 years old enrolled across public, private, and community-based pre- schools dropping by a fifth to 34 percent between 2017 and 2021. The largest decreases occurred amongst the youngest children aged 3 and 4, with much of the drop occurring before the pandemic. Internationally comparable data indicates that ECE enrollment in Cambodia improved significantly between 2016 and 2021 (61 percent) and was the second most im- proved among structural peers (after Bangladesh). However, ECE enrollment remains low compared to peers (third lowest). 54 FIG. 21 Progress on investing in the early years (area 6) Mortality rate by country, under-5 Cambodia mortality rate, under-5 (SDG 3.3) Per 1,000 live births Per 1,000 live births (Change, 2016 vs 2021) 55 2014 2020/21 50 Mya nma r 45 16% 63% 62% 40 Bang lades h 24% 35 68% Philippines 54% 30 Camb 12% odia Guatem 18% 39% 25 ala 16% Vietnam 20 5% 15 Nicarag ua 25% 10 Thailand 20% 0 Cambodia Urban Rural Female Male 2016 2021 National By Region By Gender Mortality rate by country, under-5 Cambodia mortality rate, under-5 (SDG 3.3) Per 1,000 live births Per 1,000 live births (Change, 2016 vs 2021) Guatemal a 2014 2020/21 46 5% 44 Ba ngl 34 ade sh 26% 24% 32 19 % 41% Philippin 31% es 7% 30 13 28 Myan % mar Cam 26 bod 29% ia 17% 24 22 Vietna m 13% 20 18 16 Nicaragua 6% 14 Thailand 6% 0 2016 2021 Cambodia Urban Rural Female Male 2021 National By Region By Gender 55 Pre-primary organized learning (SDG 4.1) Cambodia early childhood enrollment (% of children aged 4 to 6) Share of children (%), by age 1% 2017 2021 100 Vietnam Thailand 5% 13% 90 % ala Guatem 16% 80 a mal % te Gua % 5 6% 70 14 21% h m des 60 % 30% 61 dia Ca gla % bo % n Ba % 50 % 40 45% % Myanmar 10 34% % 0 2016 2021 Age 3-5 Age 3 Age 4 Age 5 Source: Sustainable Development Report 2023 (www.sdgindex.org); Cambodia Demo- graphic and Health Survey (CDHS); 2014 and 2021-22; and Cambodian Government. 70% participation in pre- This setback in ECE enrollment has occurred despite considerable movement on the policy front and stepped-up efforts to invest in qual- primary organized ity inputs. For example, more than 500 communi- learning in Cambodia among children ty-based preschools were constructed throughout aged 4-6 the country, and most community schools started to receive some ongoing government funding to help sustain their operations following an accreditation process. In addition, the government successfully implemented a School-Based Management Pro- gram for preschools to improve learning quality, pa- rental engagement in education, and additional financing to the preschools through voluntary contributions. Despite these advances, public funding for preschools remains low, which has hindered the construction of public preschools (there are only 211 public preschools in Cambodia or roughly one per dis- trict) as well as the recruitment of teachers and upgrading of quality (there is only one preschool teacher training college in the country). Demand for existing childcare solutions is con- strained by limited awareness of the benefits, affordability con- cerns, and existing social norms underpinning arrangements for caring for younger children. Participation rates in pre-pri- mary organized learning in Cambodia among children aged 4-6 are the lowest among its peers (70 percent), especially 38 Sustainable Development compared to Thailand and Vietnam where enrollment is nearly Report 2022, UNDP. universal.38 In addition to impacting children’s outcomes, lim- ited access to childcare centers and preschools keeps Cam- 56 bodian women from engaging fully in labor markets. Women with children under three are seven percent less likely to work, which has a more significant impact than in neighboring coun- tries such as Laos (3 percent) and Vietnam (0 percent).39 Finally, Cambodia made considerable progress on build- ing out its social protection system to protect households from shocks (area 7). At the time of the SCD1, Cambodia spent less than 0.1 percent of its GDP on social assistance— one of the lowest figures in the world—and was one of the only countries in the region without social cash transfer program (CTP). Significant progress has been made since the SCD1, with the pandemic providing additional momentum, with Cam- bodia: (i) expanding health insurance coverage to three million Cambodians in the poorest income quintile through the Health Equity Fund (HEF); (ii) launching a CTP for pregnant women and children under two years of age (CTP-PWYC) in 2019; (iii) launching an emergency “Cash Transfer for Poor and Vulner- able Households during COVID-19” (CTP-COVID) in 2020 in response to the pandemic; and (iv) launching a three-payment cash support scheme for vulnerable households affected by floods and inflationary pressures in 2022-23. These actions significantly helped mitigate—but not fully prevent—the health and economic shocks of the pandemic and natural disasters from affecting vulner- able Cambodians. For example, the out-of-pocket (OOP) share of health spending increased from 57 to 61 percent be- tween 2015 and 2020 (Figure 22); the second-highest rate among Cambodia’s peers and among the highest rates in the world. Key factors behind these rising OOP costs include: (i) low public spending on social health insurance (demand-side financing accounts of only three percent of total health expen- diture); (ii) low overall population enrollment in social health insurance (only about a third of Cambodians are covered); (iii) gaps in HEF benefits, with beneficiaries continuing to purchase uncovered services and medicines from the private sector; and (iv) declining utilization of public services, with the share of Cambodians choosing to go to a public providing first declining from 24 to 15 percent between 2014 and 2021, while the share choosing a private provider first rising from 63 to 76 percent.40 In addition, the CTP-COVID program, which provided monthly cash transfers to approximately 700,000 poor households, is estimated to have mitigated the impact on poverty by around 39 World Bank staff calculations 40 percent, helping protect almost 300,000 Cambodians from using CSES, IFLS, LECS, falling into poverty and limiting the increase in the poverty rate TLSLS, VARHS. to 2.8 percentage points (against an estimated 4.7 percentage 40 World Bank Cambodia Public point increase had the cash transfer not been launched). More Expenditure Review 2023 generous HEF benefits and CTP-COVID payments to a larger number of households could help increase the effectiveness of these programs during future shocks. 57 FIG. 22 Progress on protecting households from shocks (area 7) Health shock metrics for Cambodia Percent of total 65 % OOP health 60 spending % % 55 People that had catastrophic health % % % spending 5 People that incured % % debt to pay for health 0 2013 2015 2017 2020 Out-of-pocket (OOP) as % of Current Health Expenditure (CHE), 2020, Percent of total BANGLADESH % CAMBODIA % GUATEMALA % PHILIPPINES % VIETNAM % NICARAGUA % THAILAND % Estimated impact of Cambodia’s CTP-COVID program No intervention With CTP-COVID Number of poor Poverty rate (,000) (percentage points change) 290 (39%) . 1.9 (40%) . No With No With intervention CTP-COVID intervention CTP-COVID Source: Global Health Expenditure Database (World Health Organization); Cambodia Socio-Economic Survey (National Institute for Statistics); Cambodia Poverty Assessment 2022 (World Bank); and Sustainable Devel- 58 opment Report 2022 (UNDP). 2.4 Pathway III: Ensuring a sustainable P growth pattern ositive environmental and urban develop- ment trends drove the moderate overall progress on Pathway III.41 SCD1 identified that climate change, natural resource degrada- tion, and unplanned urbanization could affect future growth and poverty reduction. The SCD1 noted that natural disasters had caused significant deteriora- tion of livelihoods and destruction of infrastructure in Cam- bodia. The SCD1 also warned that negative externalities from poorly managed urbanization could hamper economic growth. Recent natural disasters, including floods in 2020 and 2022, and a growing awareness of climate change have strengthened the focus on planning, mitigation, and protecting households, particularly vulnerable groups, from environmental shocks. Against this backdrop, Cambodia made progress on all these issues since the SCD1. → First, Cambodia was the most successful country amongst its structural peers at reducing risks from natural disasters. The country’s ranking on the World Risk Index (WRI) improved (i.e., risks declined) by 7 places to 15th in the world under the old methodology and by 16 places to 65th in the world under the new methodology adopted in 2022 (Figure 23). Under the new methodology, Cambodia is now the least risky country amongst its structural peers, although still in the second worst quintile globally. → Cambodia was also the second most improved amongst its structural peers on the Environmental Performance Index or EPI, lifting its ranking by five places to 154th in the world. Improvements in ecosystem vitality and environmental health drove this progress. Cambodia is now the third-best performer amongst its structural peers, although still in the bottom quin- tile of countries globally on environmental performance. → Finally, Cambodia was rated "moderately improving" on 'Sus- tainable Cities and Communities’ (SDG11), driven by reduc- tions in slums and air pollution and improvements in water and sanitation.42 Despite these urban improvements, Cambodia’s cities remain among the least livable globally and amongst its structural peers. Phnom Penh is ranked 196th out of 231 cities 41 See more details and analysis on the progress 42 Sustainable of Pillar 3 in Chapter 5 of Background Papers: SCD2 Development Cambodia 2023 which is designed as a detailed Report 2022 59 compendium for this report. (UNDP) globally on livability,43 ahead of only Dhaka, Bangladesh (217th) amongst structural peers, and behind major nearby Asian centers such as Bangkok in Thailand (133rd). Moreover, rap- id urbanization, constrained resources, and inadequate urban management are making Cambodia’s cities less inclusive and efficient, and urban areas account for a growing share of car- bon emissions. Against the backdrop of accelerating urban- ization, these problems are likely to impact an ever-increasing share of Cambodians and become more considerable devel- opment risks in the future. Progress on developing natural capital while strength- ening climate resilience (area 8) has been weak, with significant policy progress yet to translate into a sub- stantial improvement in outcomes. → Conservation: Cambodia took more action than any of its structural peers since the SCD1 to increase the share of ma- rine (SDG14) and land (SDG15) areas protected for conserva- tion and now outperforms most of its structural peers on these metrics. In addition, new regulations and strategies relating to ecotourism, environmental impact assessments (EIAs), water resource management and air pollution were adopted. How- ever, despite some promising early signs, this impressive policy progress has not yet translated into a significant improvement in outcomes. For example, the rate of overfishing—which was rising sharply—peaked at 49 percent in 2016 and edged down slightly to 47 percent in 2018 (Figure 24). Similarly, the rate of permanent deforestation stabilized at around two percent be- tween 2017 and 2020. In addition, water availability per capita has declined by five percent over the past 10 years in many of Cambodia’s regions, threatening water security on several dimensions, such as agriculture, industry, biodiversity, and do- mestic water uses. → Climate change: On policy, Cambodia: (i) submitted an up- dated National Determined Contribution to UNFCCC in 2020, with more ambitious targets than those at the time of the SCD1; (ii) submitted its Long-Term Strategy for Carbon Neutrality to the UNFCCC in 2021, which emphasized the importance of forests as critical carbon sinks to achieve the proposed emis- sion targets; (iii) joined the Global Methane Pledge44; and (iv) increased public investment in projects with climate change benefits in both absolute and relative terms.45 In terms of outcomes, Cambodia has relatively low carbon emissions per capita (SDG13) compared to its structural peers (Figure 24). However, its emissions are growing fast (typical at this early 43 Mercer: https:// 44 https://www. 45 Royal Government of Cambodia, mobilityexchange.mercer. globalmethanepledge.org/ Ministry of Economy and Finance, com/Insights/quality-of- Cambodia Climate Public Expenditure 60 living-rankings Review (2021). stage of strong economic growth). Cambodia’s carbon intensi- ty per dollar of GDP is also higher than most structural peers, including Thailand and Vietnam and is over ten times higher than the OECD average. The fastest-growing sources of GHG emissions over the past decade have been electricity, heat generation, and industry. FIG. 23 Progress on key Pathway III outcomes since SCD1 Cambodia ranking on World Risk Index Rank (lower rank / higher number = lower risk) No intervention With CTP-COVID Old methodology New methodology (cited in SCD-1) (adopted in 2022) 16 7 2015 2021 2015 2022 Environmental Performance Index (EPI) Change in score between Global ranking in 2022 2012 and 2022, Percent Thailand % Thailand Cambodia % Nicaragua % Nicaragua Cambodia % Vietnam Philippines % Bangladesh Guatemala % Guatemala Bangladesh % Myanmar Vietnam % Philippines Myanmar Source: World Risk Reports 2015 and 2022 (Institute for International Law of Peace and Armed Conflict); and Environmental Performance Index Report, 2022 (Yale Center for Environmental Law and Policy, Yale University), and Center for International Earth Science Information Network, Columbia University, and NASA Socioeconomic Data and Applications Center). 61 FIG. 24 Progress on developing natural capital, while strengthening climate resilience (area 8) Fish caught from overexploited or Change, collapsed stocks (% of total catch) 2018 vs 2013 (ppt) 55 50 Thailand 1 Cambodia 10 45 40 35 30 Nicaragua 1 25 20 15 Philippines 10 10 Guatemala 17 Vietnam 5 5 Bangladesh 2 0 2013 2016 2018 Permanent deforestation Change, (% of forest area, 3-year average, 2020) 2020 vs 2017 (ppt) 2.2 2.0 . . Cambodia 0.1 1.8 1.6 1.4 . 1.2 . Vietnam 0.3 . 1.0 0.8 . Guatemala 0.1 . Nicaragua 0.4 0.6 . Philippines 0.2 0.4 . . Bangladesh 0.0 0.2 Thailand 0.1 0 2017 2020 62 CO₂ emissions from fossil fuel combustion Change, and cement production (tCO2/capita) 2020 vs 2015 (%) . 4.0 . Thailand 11% 3.5 3.0 . Vietnam 25% 2.5 2.0 . 1.5 Philippines 13% Guatemala 9% . 1.0 . Cambodia 67% Nicaragua 11% 0.5 . Bangladesh 19% 0 2014 2016 2018 2020 Carbon intensity tCO2e per million $ GDP, 2019 Change, 2019 vs 2016 (%) NICARAGUA , 17% CAMBODIA , 21% VIETNAM , 15% THAILAND 6% BANGLADESH 3% PHILIPPINES 10% GUATEMALA 9% Source: Sustainable Progress on promoting competitive, sustainable, and in- Development clusive cities (area 9) has been modest, with solid prog- Report 2022; and Climate ress on outcomes despite rapid urbanization and limited Watch. policy action. Cambodia has historically had one of the most rural-based populations in the world at over 80 percent, plac- ing it in the top 8th percentile globally and well ahead of all its structural peers, including Myanmar, Vietnam and Bangla- desh (most countries with a higher rural share are small island states).46 However, with the share of Cambodians living in ur- ban areas, urbanization in Cambodia jumped by 16 percentage points to 39 percent between 2016 and 2021 (Figure 25), more than three times the pace recorded in the preceding period. 46 Find Despite this rapid urbanization, there has been limited progress my Friends using World on the urban policy agenda since the SCD1, partly due to the Development Indicators COVID-19 pandemic, which triggered lockdowns and restric- (World Bank). tions in urban areas and the temporary return of large numbers of people to villages. However, meaningful investments have 63 been made in areas such as solid waste management. Despite this limited policy progress and the added pres- sures of rapid urbanization, urban outcomes have im- proved. For example, the proportion of Cambodian urban res- idents living in slums fell from 55 to 46 percent between 2014 and 2018 (Figure 25), the second most improved among the country’s structural peers. In addition, access to piped water in cities increased from 69 to 80 percent between 2015 and 2020 (the most improved), and air pollution levels fell by 20 percent between 2014 and 2019 (the most improved). However, there were only marginal improvements in wastewater management, with the share of water treated rising by just one percentage point to 21 percent between 2015 and 2020. There also re- mains only a limited amount of solid waste collected.47 Despite these improvements, Cambodia’s urban challenges remain significant. For example, the share of urban residents living in slums is the second highest among structural peers, while the share with access to piped water is the second lowest (in both cases, Cambodia only outperforms Bangladesh). Moreover, the combination of rapid urbanization, limited resources, inad- equate urban management and planning systems, and the fact that Cambodia’s cities are ‘growing out, not up,’ are rendering urbanization less inclusive (inequity is higher than in rural ar- eas), less efficient (congestion is growing as is the cost of ex- panding urban services across growing urban sprawls), and a growing source of carbon emissions (37 percent). FIG. 25 Progress on promoting competitive, sustainable, and inclusive cities (area 9) Share of Cambodian population living in urban areas Percent of total (%) % 16ppt % % 5ppt 2009 2016 2021 47 Pre-feasibility study on solid waste management conducted in municipalities in Siem Reap, Kandal and 64 Kampong Speu provinces in 2022 suggested solid waste collection rate for households of 45%. Proportion 60 of urban population living in slums Change, Percent of total (%) 2018 vs 2014 (ppt) 55 50 Bangladesh 7.5 Cambodia 9.5 45 Philippines 6 40 Nicaragua 3.7 35 30 Guatemala 3.5 25 Thailand 0.5 20 Vietnam 13.7 0 2014 2018 Access to improved water source Change, piped (% of urban population) 2020 vs 2015 100 (ppt) 95 Nicaragua 0 90 Bangladesh 5 Guatemala 1 85 Vietnam 9 Philippines 6 80 Cambodia 11 75 70 Thailand 1 0 2015 2020 65 Air pollution Change, Annual mean concentration of