The ruling Cambodian People’s Party (CPP), once known for its business-friendly laissez faire approach, has recently lurched decisively towards more economic populism but the costly policies are beginning to erode confidence in the long-ruling party’s economic management and direction.
In the run-up to last July’s general election, Prime Minister Hun Sen spent much time touring the country’s garment factories, Cambodia’s most important foreign currency-earning industry and a key vote bank.
In a bid to win over workers who traditionally voted for the opposition, the leader pledged higher wages and new bonuses for the sector’s 800,000 or so employees, not to mention a host of other populist policies for the wider population.
But the government may have “shot itself in the foot,” with the recent minimum wage hike, says Miguel Chanco, senior Asia economist at Pantheon Macroeconomics, a research firm.
That’s because higher wages and new bonuses could prove too expensive for many companies, especially smaller garment factory owners, to maintain profits in a cutthroat global industry.
Added to that equation is the prospect that the European Union may soon lift Cambodia’s tariff-free access to its markets in punitive response to Hun Sen’s anti-democratic clampdown, including a court-ordered ban on the opposition Cambodia National Rescue Party (CNRP).
For most of the last three decades, the CPP government has taken a mostly hands-off approach to the economy by allowing the market to determine wages and prices and tax incentives to entice foreign investors.
That approach bore fruit, despite widespread and persistent criticism of official corruption and limited labor rights. Cambodia’s embrace of free market policies catapulted the economy in the 2000s, growth rates that underwrote the CPP’s staying power.
But, according to Chanco, the “broad thrust of the [the CPP’s] policies have been populist – and in many cases, interventionist – in nature” since the 2013 general election, when it was nearly beaten by the opposition CNRP. At the time, the opposition had campaigned on a manifesto of higher wages and other populist measures.
The minimum wage of garment workers remained largely static up until 2013, but the CPP has “co-opted the CNRP’s minimum wage agenda over the last five years,” says Chanco.
The CPP arguably felt the need to expand even further its populist pledges after it dissolved the CNRP in November 2017 and in the run-up to last July’s general election, which it won overwhelmingly in a poll many observers viewed as a sham.
As the CPP promised on the hustings, the monthly minimum wage for garment factory workers rose on January 1 to US$182, up from $170 last year. That marks a near 300% increase from the $61 minimum wage earned by workers in 2012.
One independent estimate suggests that the latest minimum wage hike will cost garment sector employers an additional $90 million in wages and bonuses this year.
Added to this, thanks to CPP promises made last year, employers must now pay workers fortnightly, not monthly, a logistical headache which will also raise administrative and financial costs.
“It’s absolutely the case that Cambodia’s minimum wage has increased too fast over the past few years,” says Chanco.
He says wages have been hiked while labor productivity has remained stagnant and in places even fallen in recent years. At the same time, the price of Cambodia’s garment products has also fallen on international markets without improvements in quality.
Now at $182 per month, Cambodia’s minimum wage for garment workers is only a few dollars less than wages in Vietnam and is considerably higher than the average wages paid in Bangladesh.
Vietnam, which exported $35 billion worth of garment products last year, considerably more than Cambodia, also has far better industrial and logistical infrastructure and boasts overall higher productivity rates, analysts say.
That’s reflected in the cost of power, with electricity rates in Cambodia almost $0.20 per kilowatt-hour, while in Vietnam they are about $0.07.
The World Bank’s Logistics Performance Index ranked Cambodia 98 out of 160 global countries. Vietnam was ranked 39, Thailand 32 and Indonesia 46.
The Cambodian government will spend considerably more of its budget in 2019, which increased by 11% from last year, on infrastructure, public works, urban development and vocational training. Investment from China, its main ally, will also bolster Cambodia’s infrastructure.
But there are rising concerns that this may be too little, too late, as Cambodia’s manufacturing rivals, Vietnam, Bangladesh and Myanmar, are also investing heavily in their own manufacturing capabilities.
Politics are also hurting Cambodia’s competitiveness. The EU is now weighing whether to withdraw Cambodia from its Everything But Arms scheme, which grants Cambodian exports duty-free status.
Cambodia exported roughly $5.8 billion worth of goods to the EU in 2017 under the scheme. The loss of that access is already prompting some investors and purchasers of Cambodia-made goods to move to other, more competitive markets, according to industry reports.
In December, the Ministry of Commerce reported that exports grew by just 4% in 2018, worth $11.2 billion, compared to 19% growth the previous year. Under a new government edict introduced by the government last September and which came into effect on January 1, factory owners now must also make new payments for seniority to employees.
Intended to replace severance pay, in which owners had to pay workers if they were laid off, the new seniority bonus equates to the wages of 15 days’ work and other benefits, and must be paid annually, half in June and the other half in December.
In December, thousands of garment workers went on strike because they wanted seniority payments to be made in one lump-sum rather than two payments made each year, as the law stipulates.
Garment workers who spoke to Asia Times on the condition of anonymity said they are fearful that their employers could try to change their contracts to cancel out their back pay, or could abscond from the country without paying their bonuses.
There are also fears that after factory owners make the first tranche of seniority payments in June, they will face cash-flow problems, meaning they could close down before the second set of payments are made in December.
Following the recent unrest, some 1,200 workers were sacked by garment factories in the capital because of their “illegal” strikes, a move supported by local courts.
Some analysts, however, argue that the strikes were merely an excuse for garment factory employers to slim down their workforce in anticipation of falling shipments and profits.
“These new policies, especially the seniority payment, are being blamed for layoffs in the garment sector,” said Sophal Ear, associate professor of diplomacy and world affairs at Occidental College at Los Angeles.
The Garment Manufacturers Association in Cambodia (GMAC), an industry body, “is justifying manufacturer layoffs of employees but disregarding who is to blame: not the employees, but the government for coming up with these policies,” he added.
“So why isn’t the government stopping these layoffs? Because it can’t. It launched a policy to get garment workers’ love, but then manufacturers get around it by laying off workers.”
There is not a reliable estimate of how much the seniority payments will cost employers. But it is likely to be in the tens of millions of dollars, especially considering that payments could be backdated for almost 10 years, while some liberal guesses put the total figure close to $100 million.
The minimum wage for garment workers last year was $170 per month, so 15 days of work would roughly equate to $85 per worker. As of last year, there were roughly 800,000 workers employed in the sector.
In a leaked email sent earlier this month responding to a recent Reuters article and seen by Asia Times, a senior GMAC official stated that the “problem is the retroactive pay” and asked: “Who can bear this financial burden?”
The larger factories might be able to absorb this outlay when the first payment has to be made in June, analysts say, but there are concerns that it could put smaller firms out of business.
“Some of the smaller factories … will not be able to afford to stay in operation and make the payments, so what will they do?” Khun Tharo, a program coordinator at the Center for Alliance of Labor and Human Rights, told Reuters. He warned that some factories might simply “cash out” of Cambodia.
“Certainly, it’s always the SME sector that will feel the brunt of any change in regulation, given their naturally smaller capacities,” said Chanco.
Even Hun Sen, whose government has tried to make light of problems in the manufacturing sector, warned that workers’ demands for a lump-sum payment, as opposed to biannual payments, could lead to the closure of two-thirds of the country’s garment factories.
“Let me ask you, do we need to leave the factories to go bankrupt by collecting all the capital to provide the workers with a one-time payment and close down the factories afterward? Please consider this,” he said earlier this month.