Economic Growth, Trade Imbalances, and External Adjustment in Cambodia

This study examines the relationship between economic growth, trade imbalances, and external adjustment in Cambodia using annual time-series data from 2000 to 2024. Cambodia has achieved strong economic growth over the past two decades, supported by export-oriented manufacturing, foreign direct investment, tourism, construction, and increasing integration into regional and global markets. However, despite this growth performance, the country has continued to experience persistent current account deficits and external sector vulnerabilities, reflecting dependence on imported capital goods, intermediate inputs, consumer products, and foreign financing. The objective of this study is to identify the long-run and short-run effects of GDP growth, inflation, gross domestic savings, trade openness, and foreign direct investment on Cambodia's current account balance. To achieve this objective, the study applies the Autoregressive Distributed Lag (ARDL) approach, which is appropriate because the unit root results show that the variables are integrated at mixed orders, I(0) and I(1). A COVID 19 crisis dummy is included to account for the extreme structural break in the current account in 2020–2021. The empirical findings show that, after controlling for the pandemic shock, GDP growth does not have a statistically significant long-run effect on the current account balance, suggesting that sustained economic expansion alone is insufficient to guarantee external improvement without accompanying structural changes. Inflation has a statistically significant negative long-run effect, indicating that higher domestic prices reduce export competitiveness and worsen the current account balance. In the short run, GDP growth has a negative and statistically significant effect on the current account balance, implying that rapid economic expansion initially increases import demand before export capacity adjusts. Gross domestic savings also has a negative short-run effect, while inflation shows a positive short-run effect. The error correction coefficient is negative and statistically significant, indicating that approximately 76.4% of disequilibrium is corrected within one year. Diagnostic tests show that the revised model is free from heteroskedasticity, serial correlation, and severe multicollinearity, and the residuals are normally distributed. Overall, the study concludes that Cambodia's external adjustment depends not only on maintaining economic growth but, more critically, on improving export diversification, controlling inflation, attracting productive FDI, strengthening domestic value chains, and reducing import dependence.

Economic Growth, Trade Imbalances, Current Account

1. Agosin, M. R., & Machado, R. (2005). Foreign investment in developing countries: Does it crowd in domestic investment? Oxford Development Studies, 33(2), 149–162. https://doi.org/10.1080/13600810500137749 [Google Scholar] [Crossref]

2. Akaike, H. (1974). A new look at the statistical model identification. IEEE Transactions on Automatic Control, 19(6), 716–723. https://doi.org/10.1109/TAC.1974.1100705 [Google Scholar] [Crossref]

3. Asian Development Bank. (2024). Asian Development Outlook (ADO) April 2024: Cambodia. https://www.adb.org/sites/default/files/publication/957856/cam-ado-april-2024.pdf [Google Scholar] [Crossref]

4. Bedir, S., & Soydan, A. (2016). Implications of FDI for current account balance: A panel causality analysis. Eurasian Journal of Economics and Finance, 4(2), 58–71. https://doi.org/10.15604/ejef.2016.04.02.005 [Google Scholar] [Crossref]

5. Breusch, T. S., & Pagan, A. R. (1979). A simple test for heteroscedasticity and random coefficient variation. Econometrica, 47(5), 1287–1294. https://doi.org/10.2307/1911963 [Google Scholar] [Crossref]

6. Cadot, O., Carrère, C., & Strauss-Kahn, V. (2011). Export diversification: What’s behind the hump? The Review of Economics and Statistics, 93(2), 590–605. https://doi.org/10.1162/REST_a_00078 [Google Scholar] [Crossref]

7. Calderón, C. A., Chong, A., & Loayza, N. V. (2002). Determinants of current account deficits in developing countries. Contributions in Macroeconomics, 2(1), 1–31. https://openknowledge.worldbank.org/entities/publication/127eb66e-7904-50bb-b2f6-9ce60ad00824 [Google Scholar] [Crossref]

8. Camarero, M., Carrion-i-Silvestre, J. L., & Tamarit, C. (2025). Current account determinants in a globalized world. Empirical Economics, 68, 1497–1527. https://doi.org/10.1007/s00181-024-02686-w. [Google Scholar] [Crossref]

9. Chinn, M. D., & Prasad, E. S. (2003). Medium-term determinants of current accounts in industrial and developing countries: An empirical exploration. Journal of International Economics, 59(1), 47–76. https://doi.org/10.1016/S0022-1996(02)00089-2 [Google Scholar] [Crossref]

10. Chinn, M., & Ito, H. (2023). Current account dynamics and saving investment nexus in a changing world (Working Paper). https://www.ssc.wisc.edu/~mchinn/Chinn-Ito_CAB_May30_2023a.pdf [Google Scholar] [Crossref]

11. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427–431. https://doi.org/10.1080/01621459.1979.10482531 [Google Scholar] [Crossref]

12. Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276. https://www.jstor.org/stable/1913236 [Google Scholar] [Crossref]

13. Godfrey, L. G. (1978). Testing against general autoregressive and moving average error models when the regressors include lagged dependent variables. Econometrica, 46(6), 1293–1301. https://www.jstor.org/stable/1913829 [Google Scholar] [Crossref]

14. Hausmann, R., Hwang, J., & Rodrik, D. (2007). What you export matters. Journal of Economic Growth, 12, 1–25. https://doi.org/10.1007/s10887-006-9009-4 [Google Scholar] [Crossref]

15. International Monetary Fund. (2024). Dominant drivers of current account dynamics. IMF Working Paper. https://www.elibrary.imf.org/view/journals/001/2024/092/article-A001-en.xml [Google Scholar] [Crossref]

16. International Monetary Fund. (2025a). IMF Executive Board Concludes 2024 Article IV Consultation with Cambodia. https://www.imf.org/en/News/Articles/2025/01/27/pr-25017-cambodia-imf-executive-board-concludes-2024-article-iv-consultation-with-cambodia [Google Scholar] [Crossref]

17. Kose, M. A., Prasad, E. S., Rogoff, K., & Wei, S.-J. (2009). Financial globalization: A reappraisal. IMF Staff Papers, 56(1), 8–62. https://doi.org/10.1057/imfsp.2008.36 [Google Scholar] [Crossref]

18. O’Brien, R. M. (2007). A caution regarding rules of thumb for variance inflation factors. Quality & Quantity, 41, 673–690. https://doi.org/10.1007/s11135-006-9018-6 [Google Scholar] [Crossref]

19. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://www.jstor.org/stable/2678547 [Google Scholar] [Crossref]

20. Prasad, E. S., Rajan, R. G., & Subramanian, A. (2007). Foreign capital and economic growth. Brookings Papers on Economic Activity, 2007(1), 153–230. https://doi.org/10.3386/w13619 [Google Scholar] [Crossref]

21. Sahoo, M., Babu, M. S., & Dash, U. (2015). Effects of FDI flows on current account balances: Do globalisation and institutional quality matter? (Working Paper). https://www.freit.org/WorkingPapers/Papers/ForeignInvestment/FREIT1000.pdf [Google Scholar] [Crossref]

22. Shapiro, S. S., & Wilk, M. B. (1965). An analysis of variance test for normality: Complete samples. Biometrika, 52(3/4), 591–611. https://doi.org/10.1093/biomet/52.3-4.591 [Google Scholar] [Crossref]

23. Silva, C. A., Ordeñana, X., Vera-Gilces, P., & Jiménez, A. (2021). Global imbalances: The role of institutions, financial development and FDI in the context of financial crises. Sustainability, 13(1), 356. https://doi.org/10.3390/su13010356 [Google Scholar] [Crossref]

24. Sokang Khun. (2018). The impact of foreign direct investment on economic growth in Cambodia: Empirical evidence. https://www.researchgate.net/publication/330506086_The_Impact_of_Foreign_Direct_Investment_on_the_Economic_Growth_in_Cambodia_Empirical_Evidence [Google Scholar] [Crossref]

25. TheGlobalEconomy.com. (2025). Cambodia: Current account, percent of GDP. https://www.theglobaleconomy.com/Cambodia/current_account/ [Google Scholar] [Crossref]

26. Thirlwall, A. P. (2011). Balance-of-payments constrained growth: A reappraisal (4th ed.). Palgrave Macmillan. [Google Scholar] [Crossref]

27. World Bank. (2024). World Development Indicators. https://data.worldbank.org/indicator/BN.CAB.XOKA.GD.ZS?locations=KH [Google Scholar] [Crossref]

28. You, Yu & Lee, Junsoo & Kim, Yoonbai & Yang, Zheng, 2024. "Comovement and Global Imbalances of Current Accounts," Economic Systems, Elsevier, vol. 48(4). [Google Scholar] [Crossref]

• Impact of Foreign Direct Investment in India
• Issues Involved in Digitalisation Special Reference to Indian Tourism Growth
• Relationship Marketing and Customer Loyalty in the Fast-Moving Consumer Goods (FMCG) Industry in Nairobi County
• Financial Literacy or Financial Inclusion? Which is Which, What is What—To Achieve Uganda’s 10-Fold Economic Growth By 2040
• Harnessing Natural Gas for Economic Transformation: Overcoming the Regulatory and Infrastructural Bottlenecks in Nigeria