Cambodia's Growth Story: Key Lessons from Two Decades of Economic Progress

Key Messages:

• Cambodia's economy transformed from agrarian to industrial and service-driven, with an average GDP growth of 7.6% annually between 1995 and 2019.
• Achieved lower-middle-income status in 2015, with ambitions for sustainable, inclusive, and resilient development.
• Growth powered by surges in private and public capital, productivity growth, and strategic policy reforms.
• Key sectors driving growth include textiles, construction, agriculture, and food and beverages. Textiles emerged as the backbone of the economy, fueled by exports and foreign investment.
• Strategic Lessons from Economic Journey: Importance of peace and stability, role of liberalization and foreign direct investment, strategic infrastructure investments, and the critical role of TFP in driving growth and resilience.

Introduction

Cambodia’s economic story is one of transformation and resilience. Over the past two decades, the nation has shifted from a predominantly agrarian economy to a vibrant industrial and service-driven one, achieving an average annual GDP growth rate of 7.6 percent between 1995 and 2019. This exceptional growth performance earned Cambodia a place among the World Bank’s “Olympians of Growth.”

A key milestone in this journey includes attaining lower-middle-income status in 2015, setting the stage for long-term quality growth with ambitions of achieving sustainable, inclusive, and resilient development. These ambitions are reflected in the dynamism of Cambodia’s economy, the adaptability of its people, and the robustness of its policy frameworks.

However, alongside the success lies significant challenges. Cambodia’s reliance on labour-intensive industries, limited economic diversification, and gaps in human capital present barriers to sustained progress. Three critical drivers—surges in private and public capital, productivity growth, and strategic policy reforms—have powered this transformation, but they require recalibration to address vulnerabilities and build resilience.

This article examines the factors that have driven Cambodia’s remarkable growth over the past two decades and reflects on the key lessons learned from its economic transformation.

Cambodia’s Growth Path 2000-2022

Between 2000 and 2022, Cambodia’s economic growth remained remarkably consistent, averaging over 7 percent annually, and peaking at 13.3 percent in 2005. As shown in Figure 1, key sectors such as textiles, construction, agriculture, and food and beverages were central to this growth. The garment and textile industry emerged as the backbone of the economy, fuelled by strong export demand, foreign investment, and a large workforce. Concurrently, the construction sector boomed, driven by investments in infrastructure, housing, and commercial developments. The food and beverage industry also thrived, supported by rising domestic consumption and growing export opportunities. These achievements were bolstered by government policies, including deeper integration into global trade networks, and continued infrastructure development, fostering an environment conducive to sustained growth.

The global financial crisis of 2007–2008 disrupted the trajectory, with GDP growth falling to 4.1 percent in 2009 as global demand slowed, particularly in the textiles and construction sectors. Nevertheless, Cambodia rebounded quickly, achieving consistent GDP growth above 7 percent from 2010 to 2019, peaking at 8.8 percent in 2018. The textile sector regained momentum, while construction continued to thrive, supported by major infrastructure projects and urban real estate development. Emerging industries, including accommodation, food services, and wholesale trade, played an increasingly critical role in broadening the economic base and enhancing resilience to external shocks.

The COVID-19 pandemic in 2020 posed another significant challenge, causing GDP to contract by 3.6 percent as tourism, textiles, and hospitality sectors were severely affected. The textile industry struggled with material shortages and cancelled orders, while tourism and hospitality suffered due to limited international and domestic travel. Despite these setbacks, the economy began recovering in 2021 and 2022, with GDP growth rebounding to 3.1 percent and 5.1 percent, respectively. This recovery was driven by the resumption of infrastructure projects in construction, renewed activity in real estate and financial services, and rapid growth in digital technology. However, the recovery has been uneven, with sectors like textiles and tourism still struggling to return to pre-pandemic levels. Cambodia’s ability to sustain growth will depend on its adaptability to global market conditions, the revival of international tourism, and efforts to strengthen and diversify its economic base.

Figure 1: Contribution to growth of GDP by sectors (2001-2022)

Source: National Institute of Statistics (NIS), accessed in September 2024

Cambodia’s sustained economic growth has driven a profound transformation in its economic structure, transitioning from an agrarian-based economy to one increasingly dominated by manufacturing and services. The share of agriculture in GDP declined sharply from 36 percent in 2000 to 22 percent in 2022, highlighting the sector’s reduced significance in the broader economy. Similarly, agricultural employment dropped from 73.5 percent of the workforce in 2000 to 37% in 2022, signalling a major shift in labour dynamics and a move toward more urbanised and industrial employment.

In contrast, the industrial sector has grown substantially, with its GDP contribution rising from 22 percent in 2000 to 38 percent in 2022. Textiles, clothing, and footwear continue to dominate this sector, increasing their share of GDP from 9 percent in 2000 to nearly 14 percent in 2022. Other industries, including mining, wood processing, rubber production, and furniture manufacturing, have also played a role in driving industrial growth.

Notably, Cambodia has made significant strides in economic diversification, with the emergence of industries such as automotive manufacturing, bicycle production, solar panel assembly, electronics, tire production, and other non-garment manufacturing, including fur and dress production. These developments mark a critical step toward broadening the country’s industrial base and reducing its dependence on traditional industries. This structural transformation is reflected in the labour market, where employment in industry expanded from 8.5 percent of the workforce in 2000 to 24.5 percent in 2019. This growth underscores the industrial sector’s increasing capacity to absorb labour and contribute to economic development.

The service sector has maintained a relatively stable share of GDP, fluctuating slightly from 37 percent in 2000 to 36 percent in 2019. However, its contribution to employment has expanded dramatically, with the share of the workforce in services rising from 18 percent in 2000 to 38 percent in 2022. This trend reflects the sector’s growing ability to generate jobs and support economic diversification, particularly in urban areas.

Unpacking Cambodia's Growth Drivers

Cambodia’s growth story can be analysed using the Growth Accounting Framework grounded in the Solow-Swan model. This framework breaks down GDP growth into key components: private and public capital, labour, human capital, and Total Factor Productivity (TFP). Over the past two decades, these drivers have evolved significantly, shaping Cambodia’s economic trajectory.

From 2000 to 2007, Cambodia experienced a high-growth phase, with an average annual GDP growth rate of 9.3 percent. This growth was driven primarily by private capital, which contributed 4.4 percent annually, underpinned by liberalisation policies and foreign investment. TFP added 2.4 percent, reflecting efficiency gains and innovations across industries. Public capital also played a supportive role, contributing 1.6 percent annually. However, the contributions of labour and human capital were modest, indicating untapped potential in workforce development.

The 2008–2010 period was marked by the global financial crisis, which reduced GDP growth to 6.5 percent. Despite the downturn, private capital remained a key driver, contributing 3.6 percent. Public capital’s role increased to 2.1 percent as the government prioritised infrastructure investments to stabilise the economy. However, TFP contributions dropped sharply to 0.2 percent, underscoring the vulnerabilities exposed by global disruptions. This period highlighted the resilience of private investment and underscored the importance of public sector support during economic downturns.

Between 2011 and 2019, Cambodia entered a phase of post-crisis recovery, with GDP growth rebounding to 9.4 percent. Private capital peaked, contributing 4.7 percent, while TFP recovered to 2.3 percent, driven by efficiency improvements and economic diversification in manufacturing and services. Public capital maintained a steady contribution of 1.9 percent. However, contributions from labour and human capital stagnated, emphasising the need for greater investments in education and skills training to foster long-term growth.

The 2020–2022 period saw a sharp disruption due to the COVID-19 pandemic, with average GDP growth falling to just 1.6 percent. TFP experienced a steep decline of -4.1 percent, reflecting inefficiencies caused by lockdowns, supply chain disruptions, and shifts in consumer behaviour. Private and public capital contributions also declined as uncertainty stifled investment. On the other hand, labour’s contribution increased slightly to 1.2 percent, potentially due to workforce adjustments during the pandemic. Human capital saw modest gains, suggesting continued efforts in education and skill-building despite the challenges.

                                                        Figure 2: Key Drivers of Cambodia’s GDP Growth, 2000-2022

What Cambodia’s Growth Story Teaches Us

Cambodia’s economic transformation offers critical lessons about the drivers of growth, resilience in the face of challenges, and the importance of strategic investments and reforms.

• Peace and Stability as Foundations for Growth: The restoration of peace and political stability in 1998 marked a turning point, instilling investor confidence and paving the way for the country’s integration into regional and global economies. Stability enabled Cambodia to join international cooperation frameworks such as ASEAN and the WTO, which facilitated access to new markets and strengthened its trade and investment ties. This stability also provided a solid foundation for aligning national policies with global priorities, allowing Cambodia to focus on critical areas such as infrastructure development and private sector growth. These efforts not only enhanced the country's economic competitiveness but also positioned it as an emerging player in the global economy.

• The Role of Liberalisation and Foreign Direct Investment (FDI): Open trade and investment policies have been transformative for Cambodia’s growth. Exports surged from USD3 billion in 2001 to USD48.2 billion in 2023, driven by participation in trade agreements such as RCEP and CCFTA, as well as integration into global value chains. FFDI rose from USD9 billion in 2010 to USD44.5 billion in 2022, fuelling industries like garments, tourism, construction, and real estate. This FDI influx accelerated Cambodia’s shift from an agrarian economy to an industrial and service-driven one.

• Strategic Infrastructure Investments: Infrastructure investments have been a cornerstone of Cambodia’s economic transformation, catalysing industrial growth and urbanization. Improved transport networks, energy infrastructure, and urban development projects have enhanced connectivity, supported manufacturing, and fostered economic diversification. These developments have positioned Cambodia more deeply within regional and global value chains.

• The Role of Total Factor Productivity: TFP played a critical role in GDP growth, contributing an average of 2.4% annually from 2000 to 2019. This reflects efficiency gains from reallocating labor from low-productivity sectors like agriculture to high-productivity sectors such as manufacturing and services. However, the pandemic revealed vulnerabilities, with TFP contracting by -4.1% due to inefficiencies caused by lockdowns and supply chain disruptions. Sustaining productivity gains will require innovation and adaptability. Cambodia’s productivity growth has relied more on inter-sectoral shifts than on improvements within industries, revealing untapped potential. To build resilience and sustain growth, Cambodia must focus on enhancing intra-sectoral productivity, fostering innovation, and advancing workforce skills to adapt to evolving economic demands.