Cambodia's Economic Crossroads: Shifting from Low-Cost Labor to Productivity Growth

Cambodia's economy has undergone a remarkable transformation over the past 20 years, shifting from an agriculture-dependent nation to an industrial and service-based economy. A major driver of this growth has been its large supply of relatively low-cost labor. However, as Cambodia moves towards higher income levels, this traditional growth model faces pressure from increased competition from lower-cost economies, rising production costs, and evolving international trade conditions. In tandem, allocating more labor to manufacturing and service industries raises questions about how much additional productivity this can generate. The challenge isn’t just about creating jobs, but also about how to improve the productivity of workers and firms. Can productivity growth replace reliance on low-cost labor and labor force expansion as a main driver of growth? For much of Cambodia’s development, its growth has been driven by factor accumulation and structural transformation. Workers moved from low-productivity agriculture to manufacturing and services industries, while investment helped build more factories, infrastructure, and other forms of capital. This allowed the economy to expand rapidly by mobilizing workers and resources. The garment industry became a major example. Cambodia’s large supply of low-cost labor helped attract foreign investment and connect the country to the global supply chain. However, a 2025 study by the Cambodia Development Resource Institute (CDRI) showed that much productivity growth came from workers moving between sectors, rather than from major productivity gains within individual sectors. The problem becomes clearer when looking at productivity itself. According to CDRI, Cambodia’s labor productivity grew only around 2.5 percent annually from 2010 to 2021. However, productivity growth within industries remains a concern. Manufacturing recorded average annual productivity growth of around two percent between 2008 and 2021, while services recorded almost no average productivity growth. In contrast, agriculture performed much better with productivity growing by around 7.6 percent annually. This matters because Cambodia’s economy is becoming increasingly reliant on manufacturing and services. Sustaining growth by reallocating jobs into these sectors will not be enough. Cambodia must also enable existing workers and firms to produce more with limited resources. The challenge is shifting from creating more output by factor accumulation towards creating more through higher productivity. That makes skills, technology, and investment critical to the next stage of growth. Improving productivity ultimately depends on the quality of Cambodia’s workforce. As the economy is moving towards higher-value industries, workers need skills that allow them to operate new technologies, adapt to different production methods, and have more specialization. The CDRI Cambodia Outlook Brief 2025 highlights this as a growing problem, warning that the country’s current labor market and educational systems might not be able to meet the demand of higher-value industries. An ever-growing skills mismatch may hinder workers’ ability to advance into more productive jobs and limit their competitiveness. This makes education and vocational training especially important for growth. CDRI identifies STEM education, technical and vocational training, and soft skills as key areas for preparing workers for technology-driven industries. The World Bank’s Cambodia Economic Update identifies skills shortages and declining labor productivity as key problems in Cambodia’s future growth. Improvement in education and skills of the workforce becomes essential if Cambodia moves towards higher-productivity activities and has better use of technologies. Productivity growth is not just about introducing new machines. It is also about ensuring workers have the skills to use them effectively. Foreign investment has been vital to economic transformation. It has provided capital, created employment, and connected Cambodia to the global supply chain. However, investment alone does not guarantee higher productivity. To use foreign investment fully, Cambodia needs to attract investments that bring technological advancement, skills, and knowledge that can improve domestic firms. This is essential for diversification beyond labor-intensive industries. The CDRI’s 20 Years of FDI in Cambodia highlights the importance of FDI in national development, while pointing out the need for a shift towards greater investment in higher-value activities. Diversification into areas such as electronics, agro-processing, and more advanced services could create opportunities for workers to produce greater value. However, it shouldn’t mean having more industries. It should mean developing industries where technology, skills, and investment can raise productivity. Therefore, the goal is not to move away from FDI, but to make it contribute more to productivity, skills, and the development of domestic industries. Cambodia’s transition towards a productivity-driven economy is possible, but it won’t simply happen by moving away from low-cost labor. The country should instead make its existing workforce and capital more productive. This means policies that improve workers’ skills, encourage firms to adopt better technology, and attract foreign investment that connects with domestic industries. This transition also depends on whether Cambodia can continue moving towards higher-value industries. If boosted productivity allows workers to generate more value, Cambodia can remain competitive even as costs rise. Still, this requires government support for education, technology, and capabilities of domestic firms, rather than depending on an expanding workforce. Productivity growth can reduce Cambodia’s reliance on low-cost labor, but it cannot replace it overnight. As wages rise and the availability of low-cost labor slowly becomes less of a competitive advantage, productivity will be vital to sustaining economic growth. This transition will rest on how effectively Cambodia develops its workforce, adopts new technologies, attracts greater investment, and strengthens domestic firms. The goal here is not to abandon the growth model that built Cambodia’s economy, but to upgrade it.