Cambodian Prime Minister Hun Sen’s political move to hike the minimum wage for textile and footwear workers threatens to undermine the crucial industries, which combined account for two-thirds of the nation’s exports.
Under the executive order, announced last week, garment and footwear factory workers’ minimum wages will increase around US$2 to $192 per month beginning January 1, 2021.
Employer groups that have argued for wage reductions for next year say that this additional burden could make the sector even more uncompetitive and hinder recovery amid the pandemic-induced economic crisis.
Almost a quarter of Cambodia’s workers have been laid off since the pandemic began and after the European Union partially knocked Cambodia from a privileged tariff-free trade scheme, known as Everything But Arms (EBA), in reprisal for Hun Sen’s democratic backsliding.
The National Council for Minimum Wage, a tripartite body composed of representatives from the government, trade unions and employer groups, meets annually to discuss minimum wage increases. But it couldn’t reach an agreement for what the basic salary should be in 2021 after weeks of debate.
Most industries in Cambodia have no set minimum wage, but the salary of textile workers tends to be the highest.
Trade union representatives went into this year’s discussions demanding a wage hike of $11.59 for next year, which they say is a necessity given the ever-increasing cost of living in Cambodia. Employer groups, which had tried to have these discussions postponed by a year, demanded a $17 cut.
There are conflicting reports as to why Hun Sen intervened. One claim is that the National Council for Minimum Wage simply couldn’t agree on a figure so turned the decision over to his government to settle the impasse.
Another suggestion is that the council agreed to keep wages the same for next year, only for the prime minister to then intervene with his raise.
This isn’t out of character for the national leader. In 2014, 2015 and 2018, Hun Sen added a few dollars to higher minimum wages that his ministers had previously agreed.
While unions and business groups have tacitly accepted the decision of Cambodia’s strongman leader, who has been in power since 1985, neither side are pleased with an outcome that appears to most benefit the government.
Hun Sen is keen to maintain some calm in a country that has seen escalating youth-led protests in recent months, especially after the arrest of prominent trade unionist Rong Chhun in July. Placating garment workers with even a limited wage bump is the other side of the coin to his government’s violent crackdown on these latest protests.
It was also a populist measure by Hun Sen who has been keen in recent years to woo garment workers, who in the past typically voted for the now-banned Cambodia National Rescue Party (CNRP), the largest opposition party until its forced dissolution in late 2017.
A promise to boost the minimum wage was key to the CNRP’s campaign ahead of the 2013 general election, at which it won 44% of the popular vote. Afterward, this policy was immediately appropriated by Hun Sen’s ruling Cambodian People’s Party (CPP) as a way to curry favor with this part of the electorate.
The minimum wage for textile workers rose from just $80 in 2013 to $190 this year. Government propaganda circulated on social media shows images of Hun Sen being embraced by adoring garment workers, alongside the boast that Cambodia is the only country in Southeast Asia that has increased the minimum wage during the pandemic.
Core inflation reached 3.2% in June as Cambodia’s consumer price index hit a five-year high. The cost of living has increased significantly over the past five years. The price of fresh fish, for instance, rose by 11.4% in June compared to the same month last year.
Phnom Penh, home to many of the typically young, female migrants from the countryside who work in the textile factories, is now the sixth most expensive city in Southeast Asia, according to the Numbeo Current Cost of Living Index. It ranked fourth last year.
It is estimated that one in five Cambodians depend on salaries earned in the textile sector, as workers send home large chunks of their wages to families back in the countryside. The considerable decline of the sector during the pandemic has contributed to rising poverty in rural areas, analysts say.
Government data claims that textile exports fell by only 5.4% in the first half of this year, compared to the same period in 2019, an official figure that has raised a few suspicious eyebrows considering the loss of certain tariff-free trade privileges in the EU.
The government also asserts that only 50,000 jobs have been affected by the pandemic-induced economic crisis. But the Garment Manufacturers of Cambodia (GMAC), the main industry body, puts the number of job losses at 150,000, out of around 700,000 pre-pandemic.
In February, Hun Sen promised that furloughed textile workers would receive 60% of the minimum wage, or roughly $114 per month, with the majority being paid for by the state and the rest by employers.
Two months later, however, the leader reduced the amount to just $70 per month. It remains unclear whether Phnom Penh caved to demands from employers for the original sum to be reduced or, more likely, the government realized it didn’t have the funds to make the payments over a medium or long-term period.
Most years, employer groups have gone into minimum wage discussions with the goal of keeping salary hikes as low as possible. Seldom, however, have they demanded a cut in minimum wages, as they did this year.
Textile factory owners contend that the minimum wage is something of a red-herring, as most workers receive more than the basic salary. Employers must also pay overtime bonuses, a $7 monthly accommodation allowance, good attendance add-ons, and seniority payments for long-serving staff.
It is thought that these bonuses, on average, cost employers an additional $15 per month per worker.
Phnom Penh has put a positive spin on the minimum wage hike. “The raise is also a message to attract more investment and new factories to Cambodia,” Labor Minister Ith Sam Heng told local media.
Yet it is difficult to see how the move to increase costs would necessarily attract new investors. Indeed, if the textile sector is to recover to near pre-pandemic levels it will need substantial investment in the coming years, mostly from overseas.
Some of the factories barely surviving at present are expected to collapse once state bailout funds are withdrawn. Others will need to raise working capital to pay for operations and wages, since earnings from exports are rarely paid up-front.
A recent GMAC survey found that only 35% of factories have enough orders until the end of the year, while quarter 25% reported having no orders until the end of 2020, the Southeast Asia Globe reported last month.
To raise the necessary investment, Cambodia’s textile sector will need to show it remains competitive against its more developed and higher-end rival producers in Thailand and Vietnam.
Not only has the pandemic significantly reduced demand from Western buyers for Cambodia-made textiles, the country also recently lost many of its trade privileges with the EU, traditionally its largest textile market. Last year, the EU purchased the majority of Cambodia’s textile exports.
In August, tariffs were slapped on one-fifth of Cambodia’s exports to the EU, including some goods from the textile sector, though it is difficult to estimate the costs of the new charges.
Kimlong Chheng, director of the Centre for Governance, Innovation and Democracy at the local Asian Vision Institute think tank, has claimed that total removal from the EBA scheme would cost Cambodia’s economy as much as $650 million each year.
Given that only a fifth of trade privileges under the EBA was cut, the cost may be around US$130 million each year.
Much depends on whether textile factory owners shoulder the additional costs of tariffs by cutting into their profits, or whether they shift the additional costs onto clients by increasing prices, making Cambodia’s textile exports less competitive.
Now, factory owners must also find additional money for higher wages. If the textile sector was to recover to near full employment next year, representing around 750,000 workers, the minimum wage hike will cost employers an additional $1.5 million each month, or $18 million annually.
For years, analysts and industry insiders have warned that Cambodia’s textile sector was losing its competitive edge vis-a-vis neighbors.
Vietnam, now a Southeast Asian powerhouse for manufacturing exports, boasts far higher standards of transport infrastructure, a more productive workforce and easier export capabilities for business owners.
Cambodia’s minimum wage was already higher than its more productive neighbors, which in comparison have avoided hefty wage hikes in recent years to maintain their competitiveness.
Wages for Thai textile workers are currently $191 per month, compared to Cambodia’s US$192 from next year. In Vietnam, where wages differ based upon location, the highest salary i$182 per month. In Laos, the minimum wage is just $88 per month.
Another reason for Cambodia’s faltering competitiveness is political unpredictability. For almost two years, textile owners and investors were left guessing whether Hun Sen’s government would loosen its political stranglehold to maintain economic benefits with the EU. He didn’t and now business owners and workers are bearing the costs.
