Can Cambodia Escape the Low-Wage Trap? IMF Calls for Better Jobs, Skills and Investment Reforms

An IMF study warns that Cambodia must strengthen domestic industries, improve workforce productivity and create better jobs to sustain economic growth as it prepares to graduate from least developed country status. Without timely reforms, Cambodia risks slower growth, job losses and weaker export competitiveness, while stronger investment, governance and skills development could support long-term prosperity.

Cambodia faces a critical economic transition as it prepares to graduate from least developed country (LDC) status, with its future growth increasingly dependent on higher productivity, stronger domestic industries and better employment opportunities. A new study by the International Monetary Fund (IMF), prepared by economists Sylwia Nowak and Liangliang Zhu of its Asia and Pacific Department, draws on research from the World Bank, Cambodia Development Resource Institute (CDRI), United Nations Development Programme (UNDP), International Labour Organization (ILO) and Fraser Institute. Published in October 2026, the study, titled Policy Priorities for More Efficient Capital Allocation, Labor Absorption, and Higher Productivity, warns that Cambodia's traditional growth model, driven by foreign investment, export manufacturing and inexpensive labor, may no longer be sufficient to achieve its ambitions of upper-middle-income status by 2030 and high-income status by 2050.

Cambodia's Economic Success Faces a New Growth Challenge

Cambodia recorded average annual economic growth of 7.6 percent between 2009 and 2019, supported by foreign direct investment, manufacturing expansion and workers moving from agriculture into more productive industries. However, the IMF warns that these growth engines have not generated sufficiently broad benefits for domestic businesses.

Between 2003 and 2022, manufacturing attracted only about one-fifth of reported greenfield foreign investment, while real estate and construction accounted for the largest share. Foreign-owned manufacturers continue to depend heavily on imported materials, limiting opportunities for Cambodian suppliers and reducing the domestic benefits of investment.

Graduation from LDC status could expose these weaknesses further as preferential trade arrangements gradually disappear. A Cambodian government and UNDP assessment estimates that inadequate preparation could reduce annual GDP growth by 0.5–1.5 percentage points relative to its baseline during the four years following graduation. Approximately 165,000 jobs could also be lost, particularly in garment manufacturing.

Exporters may face higher tariffs, stricter rules of origin and growing environmental and labor compliance requirements. The IMF argues that improving productivity and strengthening domestic supply chains will be essential for maintaining international competitiveness.

One Million Returning Workers Put Cambodia's Job Market to the Test

Labor-market pressures have intensified following border tensions with Thailand, which prompted the return of nearly one million Cambodian migrant workers. Although many have secured employment, others remain concentrated in agriculture and informal activities offering limited income growth.

Agriculture continues to employ approximately one-third of Cambodia's workforce while generating less than one-sixth of measured economic value added. This imbalance highlights the need to create more productive employment opportunities.

The IMF recommends improving job matching, recognizing workers' existing skills, expanding employer-linked vocational training and encouraging businesses to offer stable employment with opportunities for wage growth.

Agricultural processing presents another major opportunity. Cambodia produces substantial quantities of rice, cashews and cassava but exports significant volumes without processing them domestically. Despite being among the world's largest raw cashew producers, Cambodia processes only a small proportion locally.

Investment in processing facilities, agricultural cooperatives, storage infrastructure and transportation could increase export earnings, strengthen rural employment and help farmers participate in higher-value supply chains.

Foreign Investment Must Create Stronger Local Businesses

The IMF argues that attracting foreign investment is no longer enough. Cambodia must ensure that international investment creates opportunities for domestic suppliers, improves worker skills and encourages technological development.

Emerging investments in electronics, automotive components and electric-vehicle-related industries could diversify manufacturing. However, their economic benefits will remain limited unless Cambodian companies can supply materials, components and services that meet international standards.

Micro, small and medium enterprises account for most nonagricultural employment and nearly two-thirds of GDP. Their ability to expand will depend on better financing, reliable electricity, efficient customs procedures and simpler business regulations.

Governance and administrative inefficiencies remain major obstacles. Businesses frequently encounter overlapping licensing requirements, inconsistent tax administration, duplicated documentation and poor coordination between government agencies.

The study recommends linking investment incentives to measurable outcomes, including supplier development, workforce training and technological upgrading, rather than simply rewarding companies for establishing operations.

IMF Growth Scenarios Reveal the High Cost of Delayed Reforms

The IMF's analysis shows that Cambodia's long-term economic performance could vary significantly depending on investment quality, labor productivity and reform implementation.

Under a low-growth scenario, annual GDP expansion could decline from 2.5 percent during 2027–2030 to 1.4 percent during 2041–2050. A medium-growth scenario suggests annual expansion of approximately 4.4–4.7 percent, while a high-growth scenario supported by stronger reforms could sustain growth of 5.2–6.2 percent across the projection periods. These scenarios are illustrative, not forecasts.

Cross-country estimates suggest that improving human development toward upper-middle-income standards is associated with output gains of 4.4 percent over seven years. Comparable improvements in business regulation and governance are associated with gains of 2.1 percent and 1.6 percent, respectively. These figures are illustrative rather than Cambodia-specific predictions.

Climate resilience, affordable clean electricity and modern infrastructure are also essential. Flooding, extreme heat and high energy costs could weaken manufacturing competitiveness and agricultural productivity.

The IMF concludes that Cambodia does not need more economic strategies but stronger implementation of existing reforms. Its future prosperity will depend on directing investment toward productive industries, helping domestic businesses expand, improving education and workforce skills, and ensuring economic growth translates into higher incomes, better jobs and sustainable development.