This paper tests the Uncovered Interest Parity (UIP) for Cambodian economy using the Generalized Methods of Moment (GMM). GMM method is used to address the weak result of simple OLS method, including the problems of endoneneity, serial correlation, heteroskedasticity. The result showed that, during the period of exchange rate stability, UIP is not valid even the country is a very highly dollarized economy and people can save in both local currency and USD in domestic banks. The UIP coefficient is negative and significant for three-month and six-month interest rates. The negative coefficient suggests that the monetary policy that tries to decrease interest rate (increase) may face the risk of currency depreciation (appreciation). If local currency depreciation is the driving force of dollarization, reducing local interest rate will encourage more dollarization in the economy.

This paper provides historical backgrounds of dollarization, the introduction of the Khmer riel and macroeconomic performance in the context of high dollarization after the Khmer Rouge regime which ended in year 1979. The high level of dollarization was caused by both economic and political factors. The history of large exchange rate depreciation and high inflation, trust in new local currency (which was abolished during the Khmer Rouge), political unrests, spending in U.S. dollars by international organizations for running elections, are among those factors. Macroeconomic environment was favourable as low inflation, stable exchange rate against U.S. dollar and high rate of GDP growth were achieved recently. Policy to gradually de-dollarize the economy is in place. However, dollarization cannot cushion Cambodian economy against recent global economic shocks such as global financial crisis in 2008 and Covid-19.  A more active dedollarization policy shall be considered.

This paper mainly estimates the returns to education employing the standard Mincerian function using the latest Cambodian labor force survey 2012, where the dependent variable is the natural logarithm of earnings and independent variables include years of schooling or educational attainment and potential experience. The paper also examines the effect of foreign language skills on earnings. This paper is divided into three sections. The first section examines Cambodia’s labor markets. The second section explores the econometric model, in particular, Mincerian function to estimate returns to education using the latest labor force survey conducted in 2012. We find that for employed persons with an educational level lower than or equal to grade 12 it is about 3.3 percent; but it is higher for males. The annualized rate of return to education for undergraduate level was approximately 17 percent. Regarding language skill, we find that people who hold a bachelor degree and can speak English can earn more than those who can speak only Khmer language. There is also a significant wage gap between bachelor holders and high school certificate holders at a ratio of 1.9.

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