Unquestionably, Cambodia’s recent transition to single-party authoritarianism affects the country’s economic prospects in myriads of ways. The garment sector, which produces 70 per cent of the country’s exports, is under pressure. Major markets in Europe and the United States passed parliamentary resolutions in 2018 that paved the way for economic sanctions against Cambodia. Most Western donors have also withdrawn their support for the increasingly authoritarian regime and it is expected that the country will lose its access to the European Union’s Everything But Arms preferential trade agreement.

While the Cambodian government increasingly relies on China to compensate for the loss of Western donors and markets, it is questionable whether long-term sustainability and prosperity will materialise from China’s investments. The ensuing construction and real estate boom does not provide access to affordable housing and energy or enhance income opportunities for the Cambodian population at large. The new wealth is mainly kept within Cambodia’s ruling class and Chinese community.

For decades, Cambodia’s economic growth has relied on the same old drivers: agriculture, garments, construction and tourism. To sustain long-term, healthy growth, these sectors are in dire need of diversification and upgrading — aptly illustrated by Cambodia’s position as the second-least competitive country in ASEAN, alongside Laos. Among the most important issues are low human capital, skills mismatch and limited diversity. While experts call for comprehensive reform of the education system, a more feasible and effective approach for the Cambodian government to undertake is the mobilisation of domestic resources through tax reform and measures conducive to business development.

One way to mobilise Cambodian talent is to tap into the vast reservoir of human and social capital fostered by non-governmental organisations (NGOs) over decades. It should not be forgotten that NGOs contribute significantly to economic development in Cambodia. Their role in providing market-relevant technical and vocational training and workplace soft skills largely remains unacknowledged. Equally, NGOs have become a fertile breeding ground for innovative approaches to social and economic challenges.

Many local NGOs are transforming into social enterprises as international donor funding declines, both as a strategy to diversify their income and as an alternative way to pursue their social mission. Such NGO-based social enterprises have the potential to diversify the traditional drivers of Cambodia’s economic growth. Among these innovations are ways to generate cheap alternative energy for rural households, create affordable housing for low-income families, revitalise traditional textile production, diversify agricultural production and preserve biodiversity, and develop ecotourism and agritourism in rural areas.

So far, two major forms of social enterprise have emerged in Cambodia. The most common form is the NGO offshoot established and managed by Western expatriates. This type of social enterprise simply cross-subsidises the projects and programs of NGOs and there is little value added beyond the income earned. If this social enterprise is embedded in the activities of the NGO under an integrated business model, the generation of earned income is just a replacement strategy for diminishing donor funding. A second, yet rare, form is the independent social enterprise that spawns entrepreneurial zest and social innovation.

As government support is minimal, social entrepreneurial activities are preferably developed within the confines of NGOs. Not only does this embeddedness provide funding opportunities, expert advice and the benefits of a well-established network, it also provides a tax exemption. Registered with the Ministry of Interior, NGOs retain donor funding and subsidies tax free. Independent social enterprises are, on the other hand, commonly registered with the Ministry of Commerce as small and medium-sized enterprises or private limited companies and taxed accordingly.

At present, most social enterprise development is undertaken first and foremost to convince donors that an NGO is eligible for a continuation of funding, and business models are selected to reduce tax payment. This clearly hampers the emergence and growth of independent social enterprises.

With a few focussed interventions, the Cambodian government could create an institutional environment conducive to doing business in general and to operating social enterprises in particular. Tax reform should include a regulatory framework that incentivises both the transition of local NGOs to social enterprises and the formation of new social enterprises independent from NGOs.

Such relatively simple measures would unlock the huge potential of human resources and network capacity that currently remain hidden and may go to waste due to diminishing donor funding. Social enterprises, supported by proper legal frameworks, could lead the way into Cambodia’s sustainable future.

Heidi Dahles is Adjunct Professor in the Griffith Business School, Griffith University, Australia.

This article is part of an EAF special feature series on 2018 in review and the year ahead.