Question 1:
Read the extracts and answer the questions that follow.
Text A — Overview of Cambodia
1. Between 2010 and 2019 Cambodia had one of the fastest-growing economies in Southeast
Asia. Most of the growth was driven by tourism, exports of garments, and improved consumer
confidence.
2. However, despite high economic growth, rural poverty has persisted, and inequality has grown
within rural populations. Approximately 90% of workers are employed in the informal sector, and
access to quality healthcare and education remains a challenge for Cambodia. Youth (under 25
years old) make up a large proportion of the labor force, but many do not complete secondary
school. As a result, those entering work are under-skilled, and human capital is low. Access to
clean water and sanitation facilities is still lacking. Export-driven growth is being threatened as
the European Union (EU), which accounts for 30% of Cambodia’s export market, recently ended
a preferential trade agreement and will now impose tariffs on Cambodian products, such as
garments.
3. Experts state that the focus on growth through garment manufacturing is unsustainable. The
garment industry, which is the largest informal employment sector, has been criticized for poor
working conditions and pay. Even workers who are formally employed can barely meet basic
needs, despite the recent minimum wage increase and introduction of a price ceiling on rents for
housing in cities. Additionally, there are reports of pollution and water waste generated by
garment factories, damaging the health of those who live nearby.
4. To help solve the market failure in the garment industry, economists recommend that the
government should support projects that encourage garment factories to adopt a circular
economy approach, either in partnership with worldwide clothing brands or by forming social
enterprises (SEs) locally. The circular economy approach can help reduce environmental waste
that occurs during production by encouraging the recycling and reusing of materials. Developing
ecotourism has also been recommended to support sustainability and provide new job
opportunities for the youth and the rural population. Furthermore, ecotourism could help
Cambodia benefit from growing world income levels.
5. Reforms in the garment and tourism industries are needed, along with improvements in
infrastructure, to maintain sustainable growth and competitiveness. Promoting entrepreneurship,
developing new skills, and increasing the use of technology would help solve current labor
market needs.
Text B — Social Enterprise (SE) in Cambodia
1. When Cambodia’s status changed from low income to lower middle-income in 2015, the inflow
of foreign aid decreased dramatically. As a result, SEs became increasingly more important in
promoting Cambodia’s economic development. Furthermore, SEs were seen as a key factor in
breaking the poverty cycle and providing opportunities for its young labor force. SEs may also
encourage local investment, which has experienced very slow growth compared to foreign direct
investment (FDI).
2. Many SEs focus on addressing issues of poverty, child rights, education, disability, health, and
environmental concerns. The main beneficiaries are children, youth, women, and people with
disabilities. Successful Cambodian examples include Phare Performing Social Enterprise
(PPSE), which is a performing arts school targeting underprivileged children. Most graduates
become full-time workers at PPSE. Another example is Hydrologic, which provides affordable
safe water options to rural households. New SEs are currently being established to ensure
sustainability within the growing ecotourism industry.
3. However, challenges exist within the SE sector. Less than 8% of SEs are formally registered
due to bureaucracy and high taxes. This limits access to potential investors and markets and
encourages businesses to stay in the informal sector. New SE start-ups often fail due to lack of
sufficient funding and the inability to attract skilled labor.
Text C — Microfinance in Cambodia
Since 1991, Cambodia has had one of the fastest-growing microfinance sectors in the world.
Microfinance has helped decrease poverty in rural areas and solve asymmetric information in
the market for loans. However, key issues have persisted, including low success rates of some
businesses due to inadequate financial literacy and expertise. Additionally, microfinance has
become increasingly dependent on funding from international banks and investors, resulting in
higher interest rates. Some borrowers have been forced to sell their land as they could not meet
their debt repayment obligations. Recently, the government implemented a price ceiling on the
interest rate for loans in rural areas to help prevent increasing household indebtedness.
Table 1: Economic data for Cambodia
Indicator 2010 2019
Real gross domestic product (GDP) (annual growth rate, 6 7
%)
Real GDP per capita (US$ PPP) 2603.58 4388.80
Population (million) 14.09 16.49
Tourism sector (% of exports) 28 25
Garment sector (% of exports) 62 78
FDI (% of GDP) 8 14
FDI (% of total investment spending) N/A 58
Ease of doing business (ranking out of 190 countries) 145 144
Number of microfinance loans (thousands) 978 1921*
* 20Й16 figure
Table 2: Development data for Cambodia
Indicator 2010 2019
Human Development Index (HDI) 0.551 0.594
Inequality-adjusted Human Development Index (IHDI) 0.384 0.475
Gini coefficient 0.331 0.372*
Happy Planet Index 52.1 57.8
Rural population (% of total population) 79.7 76
Secondary school completion rate (%) 49 58
Life expectancy at birth (years) 66.6 69.8
* estimate
a) (i) Define the term human capital indicated in bold (Text A, paragraph 2). [2 marks]
(ii) List two components of the Happy Planet Index indicated in bold (Table 1). [2 marks]
b) (i) Using information from Table 1, calculate Cambodia’s real GDP for 2019 (in US$ PPP).
[3 marks]
(ii) Sketch an AD/AS diagram to show the possible impact on Cambodia’s economy of the
change in consumer confidence (Text A, paragraph 1). [2 marks]
c) Using a business cycle diagram from 2010 to 2019, explain how economic development may
have changed after forming Social Enterprises (SEs) (Text B) and the period of economic
challenges (Text A) in Cambodia. [4 marks]
d) Using a labour market diagram, explain the possible impact of increasing the minimum wage
on Cambodia’s unemployment rate (Text A, paragraph 3) [4 marks]
e) Using an AD/AS diagram, explain how the end of the EU's preferential trade agreement (Text
A, paragraph 2) may affect Cambodia’s real output. [4 marks]
f) Using a circular flow of income diagram, explain the impact increased microfinance could
have on the Cambodian economy (Text C). [4 marks]
g) Using information from the text/data and your knowledge of economics, evaluate the
consequences of economic growth experienced by Cambodia. [15 marks]
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