Why Is Cambodia’s Informal Economy So Large?

Take a stroll through any Cambodian city and the informal economy is difficult to miss. From small family-run shops and food stalls to independent workers and household businesses, millions of Cambodians make a living outside the formalised economy.

This makes Cambodia’s informal economy more than a minor issue. It is strongly related to household incomes, especially during periods of economic downturn. The World Bank’s June 2026 Cambodia Economic Update highlights the significance of protecting jobs and livelihoods as Cambodia faces rising costs, a decline in the real estate sector and the return of nearly one million migrant workers. The nation continues to draw in foreign investment and generate formal employment.

This raises a more complex question than whether informality is “good” or bad”. It is to understand why so many businesses and workers remain informal and if bringing them into it would actually improve their livelihoods and productivity.

Why do Businesses Remain Informal?

For many businesses, staying informal is not simply a choice to avoid taxes or regulations but an economic necessity. The World Bank estimates that Cambodia had around 677,000 informal businesses in 2022, representing about 90% of all enterprises. Many of which are small businesses that don’t have the capital to justify the cost of registration and compliance.

For others, the decision is deliberate. Formalisation can bring access to finance, markets and legal protections, but it can also introduce additional tax and regulatory burdens. If these costs outweigh the benefits, remaining informal may be seen as a rational decision for small businesses.

This creates a difficult policy challenge. Requiring businesses to register may increase the number of formal firms on paper, but it does not guarantee to make those firms more productive or increase growth. Therefore, the question is not only asking how to formalise businesses, but how to make it worthwhile.

The Productivity Problem

The size of Cambodia’s informal economy matters because informality limits the growth of businesses. According to the World Bank’s December 2025 Cambodia Economic Update, informal firms are 2.6 times less productive than formalised businesses. Limited access to finance, technology and formal markets make it difficult for informal firms to invest, improve productivity and expand their businesses

The World Bank indicates that the informal sector is highly diverse, ranging from “Survival Enterprises” that provide a basic livelihood for vulnerable families, to “High Performers” that can match or exceed the productivity of formal firms and sometimes compete on an uneven playing field.

Differentiation between business size matters for policy. A small household business operating informally might not get immediate benefits from formalisation, while a growing business will have much more to gain from access to finance, markets and regulations. Therefore, the challenge is to identify which businesses have potential to grow and make formalisation worthwhile for them.

Should Cambodia force Formalisation?

Cambodia faces a policy trade-off. Formalisation may strengthen access to finance, markets and regulation, but small businesses forced to register may impose costs they cannot afford. For “survival enterprises”, these costs could reduce their income rather than increase productivity.

A better approach is to make formalisation attractive than remaining informal. The World Bank recommends lowering registration fees, expanding digital services and providing clearer incentives for businesses with growth potential. Cambodia’s National Strategy on Informal Economy Development 2023–2028 similarly focuses on simplifying registration, reducing cost burdens and improving access to finance, skills and protection.

Hence, the goal shouldn’t be to have more formal businesses, but to have more businesses that can grow, invest and become productive.

Conclusion

Cambodia’s informal economy is too large to be treated as a problem that can be simply solved through policies. It supports millions of livelihoods, but also limits productivity and access to opportunities for many businesses. The most effective strategy in tackling this problem is to gradually formalise. Protect those who rely on informality and attract businesses that are capable of growing. In doing so, Cambodia can turn formalisation from a burden to pathway towards higher productivity and better livelihoods.

Ultimately, Cambodia does not need to eliminate its informal economy – it needs to make its formal economy worth joining

Roland Phirum is an aspiring economist from Paragon International School. The views and opinions expressed are his own.

-Phnom Penh Post-

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Independence Monument, the centre of the Cambodian capital, Phnom Penh. Post Staff