Different studies have been conducted to unpack the genesis of how China’s economy grew from an average of 5.3% GDP between 1960 and 1978, to an average of 10.4% in 2010. There are valuable lessons to be learnt from these studies and to which parallels can be drawn for countries with vibrant informal economies looking to spur economic growth. One such study that was conducted by Professor Franklin Allen of Wharton University indicated that in as much as China’s consistent economic growth over the past five decades has been spearheaded by state owned and publicly traded companies, the informal sector contributed immensely to this drive. While the former grew at an annual rate of 4% from 1995 to 1999, the latter grew at 19%.
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It further noted that rather than turn to banks for financing, entrepreneurs tended to raise capital through local community networks and investors from abroad through informal borrowing from firms and institutions. Linking this to the Kenyan scenario, I believe that the key to the success of such a path heavily lies with the strengthening of informal sector organisations such as Savings and Credit Cooperative Organizations (SACCOs) as these are the bodies that are used by players in the sector.
The Chinese government has facilitated the growth of informal businesses from small business units to a level where they have become profitable entities that have been the backbone of the country’s industrialization agenda. Another study by the Lancaster University Management School points to the fact that the introduction of a household responsibility system (HRS) in China gave individual households autonomy over agricultural production and were incentivised to increase output. The resultant improvement in agricultural productivity enhanced the release of excess labour from the agriculture sector and reallocated it to the industry and services sectors. This policy saw the share of agricultural employment fall from 70% in 1979 to 35% in 2011.
With farmers being more profitable, the extra disposable income was pulled and invested in town and village owned enterprises (TVEs), which were largely informal. It is interesting to note that although TVEs did not get preferential government treatment, they were not subject to widespread state regulation, an aspect that enabled them to grow faster than state owned organizations. Though TVEs were not private firms in the sense that they were owned by local communities rather than sole private owners, they cultivated a culture of competition which helped stimulate the efficiency of state owned enterprises. It is worthy to note that they were the major export drivers whereby for example, in 1999 their export value accounted for 48% of China’s total exports.
These two studies clearly highlight the importance of how concerted efforts to increase the productivity of small scale businesses lead to a government and its citizens reaping the fruits of economic growth and prosperity. It is not surprising that given such reforms, the World Bank indicates that the current poverty rate in China is under 2%, down from 90% in 1981 having managed to lift 800 million people out of the bracket. Clearly, they are doing something right which we can emulate.
Informal Economy Analyst.