THE DRASTIC TURNABOUT

The global financial and economic meltdown is by far the worst shock that has struck post–conflict Cambodia. Against the backdrop of the most stable political scene in the country in almost three decades, the Asian financial crisis hit Cambodia in 1997–98 followed by the food and energy shocks ten years later. These shocks caused damage but not enough to elicit a turnabout in the country's macroeconomic growth and progress in poverty reduction. In contrast, the global financial and economic downturn, which became evident in Cambodia by 2008–09, put a stop to the country's nearly two–decade long positive growth and poverty reduction.

This chapter discusses the macroeconomic and sectoral impacts of the global crisis based on the crisis transmission framework described in the first chapter, that the impact of the shock was shaped by country–specific circumstances. The economic turmoil that erupted in the developed world spilled over to developing countries chiefly through its impact on trade and capital flows. The degree of a country's exposure to the external shock was hence influenced by its trade and financial openness and composition.

Following a brief account of the global recession's impact on aggregate output in Section 2, Section 3 tackles the overall impact of the global recession on Cambodia's trade and capital inflows. Sectoral exposure to the crisis ultimately depends on the bias in such flows and the country's overall economic growth pattern. Cambodia's double–digit growth in the decade before the crisis relied on a narrow economic base. As examined in Chapter 1, four sectors — garments, tourism, construction and agriculture — were primarily responsible for the country's growing trade and investment inflow. The first three sectors ushered in the country's economic structural transformation. Section 4 recounts how the growth sectors fared in the face of the external shock. It is interesting to note that the contractions in at least three of the growth drivers can be partly ascribed to the effects of other covariant crises.