Informal economy

A path to progress for Cambodia: Unlocking opportunities through formalization

While the road to formalization in Cambodia is not without its challenges, it is a journey well worth making as Oktavianto Pasaribu officer-in-charge/Deputy Director of the ILO Country Office for Thailand, Cambodia and Lao People's Democratic Republic explains.

Press release | Phnom Penh, Cambodia | 15 January 2024
Informal workers make up 88 per cent of the Cambodian workforce. © Khem Sovannara/ILO
PHNOM PENH, Cambodia (ILO News) – In the realm of economic development, Cambodia has made significant strides over the past decade. The nation has witnessed rising household incomes, a shift in workforce composition, and a transition towards more diverse economic sectors. However, amid these accomplishments, a critical challenge persists – informality.

Informality, characterized by economic activities and workers not covered or insufficiently covered by formal arrangements, remains a widespread issue in Cambodia. A recent labour force survey revealed that, in 2019, a staggering 88 per cent of the Cambodian workforce was engaged in informal employment.

The consequences of informality are far-reaching, affecting workers, enterprises, and the State. Formalization on the other hand, offers tangible benefits to all stakeholders.

For workers, formalization brings the promise of access to National Social Security Fund (NSSF) schemes such as work injury insurance, healthcare insurance and old-age pension. It can also bring higher wages, improved working conditions and better labour rights protections compared to their informal counterparts. This transition from informal to formal employment holds the potential to uplift workers and their families, providing them with greater security and dignity.

Enterprises, regardless of their size, can reap significant advantages through the formalization process. Formal enterprises will enjoy advantageous access to financial services through SME banks and opportunities for developing entrepreneurial and management skills through public agencies such as Khmer Enterprises, complemented by timely support in times of crises, such as the wage subsidy programs during the COVID-19 pandemic. Additionally, they will gain access to a skilled workforce, which bolsters their capacity and earns them a heightened level of trust and credibility among clients and partners.

However, it is important to note that formalization also carries increased compliance costs. While the Cambodia Data Exchange (CamDX) has streamlined and simplified the registration process for businesses, formalization does come with certain financial requirements and obligations, albeit lower than traditional methods. These costs include fees associated with business registration, taxes, and other regulatory requirements. Despite this, the overall benefits of formalization far outweigh the financial burdens, offering enterprises the potential for sustained growth and resilience in a dynamic business environment.

The State, too, reaps its share of rewards from formalization. An expanded tax base, generated through social security contributions and tax receipts, bolsters government revenues. This shift in the tax mix, from heavy reliance on indirect taxes to a more balanced one, has the potential to enhance funding for social protection policies and other critical initiatives.

The International Labour Organization (ILO) in Cambodia considers its work in the policy area of formalization as fundamental. The ILO has been actively supporting the Royal Government of Cambodia (RGC) in addressing the problem of informality and the expansion of social protection coverage through the Advancing Social Protection (ASP) Project funded by the European Union.

The EU-ASP Project has undertaken a range of activities aimed at providing support in policy development, programme development, capacity building and peer learning from other nations.

As Cambodia moves forward in its pursuit of formalization, the recently unveiled “National Strategy for Informal Economy Development 2023-2028” is a significant step towards progress. It recognizes that formalization holds the key to a brighter future for Cambodia and its people.

Putting the plans into action requires the collaboration of all stakeholders: workers, employers and the whole-of-government. The implementation of the strategies and initiatives that support formalization will make it easier for enterprises and workers to participate in the formal sector. Streamlining processes, providing clear guidance, and continuing to foster a business-friendly environment that encourages compliance will be the guiding principles.

Employers from micro-small and medium enterprises can embrace formalization as a strategic step towards growth and sustainability. Compliance comes with benefits like access to new markets, financial services, and government support during challenging times. New entrepreneurs and existing enterprises can, for example, visit and explore the business registration requirements as well as the learning and incentives opportunities available.

Employees and the self-employed can take charge of their future by getting informed about the benefits of formal employment. Understand how formalization can lead to higher wages, better working conditions, and access to essential social security benefits. Workers can call the NSSF hotline 1286 to obtain information about their rights and opportunities to join the formal workforce and, for example, register with the new social health insurance scheme to protect both themselves and their loved ones.

While the road to formalization is not without challenges, it is a road worth traveling. The transition to formality may entail initial hurdles, including compliance costs and regulatory adjustments. However, the benefits that lie ahead – improved livelihoods, social protection, and economic growth – far outweigh these challenges. Together, we can work towards a Cambodia where every worker and enterprise thrives, contributing to the nation's prosperity.