Over the past 25 years, Cambodia successfully cut its poverty rate from over 50 percent to under 20 percent. However, the model driving this success now faces severe headwinds. Due to ongoing global price shocks and a sharp, year-long slump in remittances prompted by the Cambodian-Thai border dispute, more than a million people risk falling back below the subsistence level, according to the World Bank. This vulnerability underscores the fragility of Cambodia’s growth model. Without structurally transforming the domestic economy, hard-won social progress remains in jeopardy.
In its June 2026 Cambodia Economic Update, the World Bank painted its usual optimistic picture of macroeconomic resilience with projected GDP growth of 3.9 percent in 2026 and 4.9 percent in 2027 amid rising exports and accelerating momentum in new industrial sectors. Yet these signs of progress conceal a deep structural problem: Cambodia remains a dual economy.
On the one hand, the country boasts a highly productive export sector, dominated almost entirely by foreign, primarily Chinese, investment, which manufactures garments and footwear for global companies. This side of the economy operates largely as an enclave, relying on few domestic factors other than cheap labor. On the other hand, a fragmented and technologically deficient domestic economy consists largely of small and medium-sized enterprises (SMEs) that struggle to compete internationally and remain concentrated in the informal sector. In 2022, 90 percent of all businesses fell into this category, yet they generated only about 40-45 percent of GDP, according to World Bank statistics.
Cambodia Could Fall Into the Middle-Income Trap
All of this points to the exhaustion of Cambodia’s existing growth model. The purely quantitative shift of labor from subsistence farming into textile factories – the classic “reallocation dividend” described by the Lewis model – is no longer generating significant productivity gains. To avoid falling into a middle-income trap, Cambodia must turn FDI into a vehicle for technology and knowledge transfer to the domestic economy. The middle-income trap occurs when countries escape poverty but then stagnate: rising wages erode their advantage in low-cost labor, while they lack the innovation capacity needed to compete with advanced economies.
Should East African nations, particularly Ethiopia and Kenya, boost their competitiveness in the coming years, Cambodia could face intensified pressure in labor-intensive export industries. Domestic pressures are also mounting, driven by what the World Bank anticipates to be the inevitable closure of Cambodia’s demographic window around 2043. Currently, the country benefits from an exceptionally young population and a temporary surplus of working-age people. However, if Cambodia fails over the next two decades to equip this generation with the skills it needs through substantial investment in education and to integrate young workers into higher-value supply chains, the country risks growing old before it becomes prosperous.
In its update, the World Bank recommended a three-stage reform: safeguarding subsistence farms through social protection; boosting SME productivity through better credit access and digitalization; and formalizing high-performing local businesses to help them qualify as suppliers to major foreign investors.
However, this economically sound solution reflects a purely technocratic understanding of Cambodia. It treats the country as a rational institutional landscape while ignoring its political economy. The country’s real obstacle is not a lack of administrative guidelines or digital portals, but the deeply entrenched system of patronage and oligopoly that has developed under the ruling Cambodian People’s Party (CPP) and significantly constrains market efficiency and innovative entrepreneurship.
The Elite Pact and the Limits of Innovation
In Cambodia, economic success depends less on productivity or innovation than on proximity to political power. This system, closely resembling the crony capitalism of Suharto’s Indonesia and Marcos’ Philippines, is institutionalized within the Oknha class – an oligarchic economic elite that secures exclusive market access, state land concessions, and protection from foreign competition through million-dollar donations to the regime.
This elite pact fundamentally distorts entrepreneurial risk. Large domestic conglomerates, such as the Royal Group, Canadia/OCIC, Chip Mong, or the LYP Group, focus heavily on protected, domestic-market-oriented sectors like real estate, financial services, gambling, telecommunications, and trade. While not all of these entrepreneurs lack productivity, the institutional environment rewards political rent-seeking rather than competitive, global industrial value chains. For a Cambodian oligarch, making high-risk, multimillion-dollar investments in R&D or high-precision manufacturing is simply not economically attractive.
Politically safeguarded rent-seeking in a protected domestic market offers a far more lucrative risk-return profile than fierce international competition against regional rivals. Simultaneously, this system stifles the productive middle class. Independent, innovative SMEs find it nearly impossible to scale up. If they break into profitable niches, they risk having their business models appropriated by politically connected actors, as property rights in Cambodia remain poorly protected without political patronage. Under such conditions, qualified Cambodians seek advancement mainly in the civil service or the military, two arenas where power easily translates into personal gain.
Cambodia Lags Behind in Regional Comparisons
When seeking solutions, international analyses frequently point to regional success stories, particularly Malaysia and Vietnam. Yet these comparisons serve only to highlight Cambodia’s severe shortcomings. This institutional gap is vividly reflected in the Bertelsmann Transformation Index (BTI). While Cambodia has scored the absolute lowest mark of 1 out of 10 in anti-corruption policy since 2018, Vietnam (5 points) and Malaysia (6 points) remain on an entirely different institutional trajectory.
According to BTI criteria, Cambodia’s minimum score indicates a total failure to control corruption, with core integrity mechanisms – such as independent public expenditure audits, official accountability mechanisms, or transparent procurement systems – effectively non-existent. While Vietnam and Malaysia also display functional shortcomings, they maintain established core mechanisms that guarantee businesses at least a basic level of institutional predictability. These quantitative discrepancies have fundamentally crippled the country’s economic dynamics.
The prime historical example of overcoming this form of dual economy is Malaysia’s Penang region. In the 1970s, Malaysia faced similar enclave challenges that Cambodia encounters today. Building on a more professional bureaucracy, Malaysia broke this enclave structure through three approaches: a targeted cluster policy; state-run matchmaking agencies like the Penang Development Corporation, which guided local firms toward multinational corporations’ quality standards; and the Penang Skill Development Centre, a state-funded education hub managed directly by foreign tech giants. Cambodia, by contrast, lacks both the institutional capacity for such matchmaking and an education system aligned with real-world market needs.
Conversely, Vietnam, with its socialist-oriented market economy, outperforms Cambodia in strategically coordinating economic actors. Although links between FDI and its local economy remain weak, Hanoi has countered this with an assertive, state-led industrial policy and a relatively effective anti-corruption campaign. Rather than leaving the market to its own devices, Hanoi deliberately cultivates state-affiliated conglomerates like Vingroup or Viettel to act as spearheads of its industrial strategy. In exchange for market access, the government leverages these “national champions” to demand technology transfers from global giants like Samsung or Intel. In contrast, Cambodia’s laissez-faire approach in its Special Economic Zones leaves such matchmaking entirely to a flawed market, where local inefficiencies prevent it from ever taking place.
Political Implications and Necessary Measures
The generational transition from long-serving Prime Minister Hun Sen to his son Hun Manet has done little to alter the existing political dynamics in Cambodia. While the Western-educated, second-generation CPP cadres push for superficial modernization and administrative digitalization, the underlying political deal remains untouched: the Oknhas continue to bankroll the regime’s grip on power in exchange for the protection of their domestic fiefdoms. Hence, dismantling the dual economy requires more than new, technocratic reform packages; it demands a fundamental realignment of economic incentives with measurable conditions that do not fundamentally conflict with the regime’s political interests.
First, the government must stop shielding domestic monopolies. State concessions, loans, and licenses for domestic conglomerates should be strictly contingent on international competitiveness and export revenues. Those who fail in the global market must lose their political protection.
The second priority is to create a genuinely meritocratic civil service. As long as posts in key ministries and regulatory bodies are bought or inherited at exorbitant prices, SME support is doomed to fail. Subsidies and administrative aid must be managed by a professionalized, merit-based civil service, isolated from dysfunctional patronage networks.
Finally, the government must recognize that relying purely on SEZs for diversification is no longer enough. To break the dual economy, the government must offer tax incentives to foreign investors who enter long-term joint ventures with local firms, ensure technology transfers, and promote local talent to management positions. Simultaneously, physical technology clusters must logistically and geographically link local suppliers to anchor multinational corporations.
As long as the systemic logic of elite distribution dominates economic policy, technocratic proposals like those that the World Bank has suggested for years will remain insufficient. The case of Cambodia proves that sustainable economic modernization is inextricably linked to the quality of governance. A political transformation grounded in the rule of law and oriented toward the common good is a mandatory prerequisite to prevent the market order from becoming a mere façade. Without shifting away from a rent-seeking economic model, Cambodia will miss its chance to become a competitive industrial nation, remaining permanently stuck in a stalled transformation.