Lessons from China’s Economic Policy

Over the years, China has managed to turn around its economy by instituting certain reforms which have seen the country’s economy grow exponentially during the last 60 years into a global economic powerhouse. Most of these were done by recalibrating how they interacted with the informal sector in their country. The reforms first took shape in the agriculture sector with the household responsibility system (HRS) replacing the people’s commune system. Under this system, individual households were instituted as the basic unit of farm operation, as opposed to a collective team of 20 to 30 households in the past. The HRS gave individual households autonomy over production and farmers were given incentives to increase output.

(Source: http://media.philstar.com/images/the-philippine-star/business )

A study carried out by the Lancaster University Management School indicates that Between 1978 and 1984, China’s average annual growth rate of agriculture was 7.7%, after the introduction of the household responsibility system. The significant improvement in agriculture helped the country to release labour from land to industry and service sectors. This labour reallocation process was necessary as China’s agriculture was characterised by an egalitarian system of distribution of cultivated land with more than 200 million rural households, each cultivating less than 0.55 hectares. With the improvement in productivity in the agricultural sector, there was no need for a large number of people to stay on land. Agricultural employment as a share of labour force fell from more than 70% in 1978 to 60% in 1990 and 35% in 2011. The release of such a large number of economically active population from land hugely helped China’s development of the labour-intensive, low-skilled manufacturing sector.

In addition to the introduction of the HRS, China successfully re-introduced marketization. In implementing agricultural reforms, China first tried a dual-track approach. Under this approach, farmers were required to deliver a portion of their output to the state and allowed to sell the rest of the output on the free-market. With the newly earned profits, farmers set up or pulled resources into town and village owned enterprises (TVEs). These are communal organizations managed by managers on a contractual basis.

Town and village owned enterprise operate outside of the Chinese government’s apparatus and were highly market-oriented. Even though they did not enjoy preferential government treatment, they were also not subject to widespread state regulation. The study further notes that between 1979 and 1991, TVEs grew at an average rate of 25.3% in comparison to that of state owned enterprises which grew at 8.4%. Though TVEs were not private firms, since they were often owned by local governments or local communes rather than solely by private owners, they cultivated an internal culture of competition in the Chinese economy which helped stimulate efficiency of the state‐owned enterprises. It is worthy to note that TVEs were the major export drivers of China’s impressive export growth. For example, in 1999, the value of TVE exports of US$94 billion accounted for 48% of China’s total exports. Much of these were labour‐intensive products involving simple production techniques.

Another aspect that accelerated China’s growth and economic success can be attributed to privatisation. The study notes that the ownership structure of private firms was not properly defined until 1988. Private firms only became an integral part of the Chinese economy in 1997 and had their legal status established in 1998. The rapid growth of the private sector began with the introduction of the policy whereby the government not only lowered entry barriers in most sectors, but also pursued a policy of “grasping the big, and letting go of the small”. This meant that State Owned Enterprises were to only be kept in “strategic sectors” whereas small and medium sized enterprises (SMEs) were either privatised or their ownership transferred from the central government to local governments.

Lastly, the study shows that China’s development in manufacturing has also benefited from inward foreign direct investment (FDI) whereby the early years of China’s history of inward FDI was particularly dominated by the Chinese diaspora. Chinese diaspora-invested firms cooperated with TVEs and other indigenous Chinese firms and introduced them to international markets as well as freed them from domestic market constraints. In this sense, the diaspora-invested firms also helped indigenous Chinese firms to exploit the country’s comparative advantage in cheap labour and to translate its comparative advantage into international competitiveness.

Kenya is a country whereby about 75% of the population rely on agriculture for employment and livelihood. Outside agriculture, a vast majority of its citizens are employed in the informal economy, accounting for 90% of the employment demographic. The route taken by China is one which the country can borrow a leaf from when looking towards ways in which it can transform and grow its economy through agriculture and manufacturing.

litualex@gmail.com

Informal Economy Analyst.

 

 

 

Leveraging Informal Business

Considering the fact that sustained poverty coupled with subpar economic growth has continued to inhibit growth in the demand of locally manufactured goods, effective demand continues to shift more in favour of relatively cheaper imported manufactured items. In addition, the high cost of inputs informed by poor infrastructure which leads to high transport costs has led to high prices of locally manufactured products thereby limiting their competitiveness in the local and regional markets. With the view of looking towards ways in which this trend can be turned around to benefit locally manufactured products, certain aspects need to be taken into consideration.

(Source:http://ddt5juiq7j39k.cloudfront.net/wp-content)

Working through the informal sector is one of the avenues that presents a huge opportunity when it comes to penetrating the local and regional markets. The sector has market networks that are vastly untapped. Formal firms need to venture further into fostering links with informal firms in a way that is mutually beneficial. In this sense, there are different ways in which this can be achieved.

The first and foremost aspect that formal firms should look into in order to get the right partners to work with in the informal sector is that of the business structure that is present in the informal business that they intend to partner with. The importance of ensuring that they establish this aspect is, among other factors to assist them in better understanding the client profiles of the clients serviced by informal firms.  Informal businesses have an access to clients that would not be readily available to formal businesses. Customers to their businesses often purchase goods and services that are at a lower price point. Tapping into the economies of scale from this angle will be a huge plus for any formal business that can avail their products and services that meet the needs of these customers. Unpacking this dynamic will assist in coming up with tailor made marketing structures around which they can upscale the production of their products and services.

Another thing to consider that is of importance in as far as fostering beneficial relationships relates to the different levels of  capacity present in the informal firms. These include, but are not limited to technical and financial skills. Most informal firms primarily under perform due the low levels of the above mentioned. Formal firms can work to improve the level of these skill sets which will go a long way in improving the quality of goods and services that they produce. Mentoring informal firms in this way will enhance their capability to deliver goods and services that are of a higher quality as well as enhance their systems of operation. This will further improve and strengthen the various aspects that are related to the operational systems of formal firms such as their chains of distribution.

An area that would be worth exploring for formal firms as they seek to establish formidable links with informal businesses is that of targeting businesses that are part of an association, be they in the form of Sacco’s or cooperatives.  Micro, small and medium sized businesses that are members of associations within their realms of operation tend to be more focused and better organized. This is due to the fact that they draw valuable lessons from each other on best industry practices. These sorts of associations provide a unity of purpose and act as a pillar of stability for informal businesses for it is through them that they can better interact with other bodies such as government bodies in cases of conflict resolution or even financial institutions whenever they require to access loans. Associations in this sense, offer security to the individual entrepreneurs, for it is through these that they can access loans to grow their businesses as well as better market their products.

Businesses in the manufacturing sector should look into value addition strategies that target the micro and small businesses that they intend to be suppliers of raw materials for their finished products. This is especially important for those that rely on agricultural raw materials. Partnering with small scale farmers for example, with a view of improving the quality of their yields, is a worthwhile investment. Promoting a culture of interacting with these farmers on best practices in crop and animal husbandry is a long-term investment that will ensure a long term consistent availability of good quality raw materials, as well as improve the incomes on both sides of the coin.

By looking into the above factors, formal firms can have a better understanding of informal businesses when trying to create partnership opportunities that grow their businesses. Working with the associations that informal businesses are a part of will enhance the capability of formal firms to choose credible businesses through which they can further harness their growth agenda as well as build the capacity of informal businesses.

litualex@gmail.com

Informal Economy Analyst

An Overview of the Informal Sector

The informal economy is characterised as micro and small businesses whose main reason for being established is that they offer an escape route from the tough economic conditions under which the entrepreneurs live. During the past decade, the sector’s growth has mainly been propelled by the shrinking availability of formal employment opportunities. This limited access to formal employment causes most of them to venture into alternative forms of self-employment as a means to making ends meet. As a result, there has been a change in the way people perceive the informal as being traditionally one that was the preserve of those who had attained a basic level of education. There has been a gradual shift in its perception whereby it was fondly referred to as the ‘Jua Kali’ sector, towards one which presents itself as an option for those locked out of formal employment opportunities.

(Source: https://cdn.mg.co.za/crop/content/images)

The Micro Small and Medium sized Enterprises (MSME) Survey 2016, a report released by the Kenya National Bureau of Statistics established that there were about 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. The findings of the survey also show that total number of persons engaged in the sector was approximately 14.9 million Kenyans. Further, the Kenya Economic Survey 2017 indicates that the number of new jobs created in the economy was 832.9 thousand. Of these, 85.6 thousand were in the formal sector while 747.3 thousand were in the informal sector. The share of jobs in the informal sector represents a 5.9 percent growth from 83 percent in the previous year to 89.7 percent, or 13.3 million people. The problem is that employment in the informal sector is characterised by numerous low quality jobs.

Some of the challenges that informal businesses face include low capacity in as far as financial and technical skills are concerned. This makes it difficult for them to access financial collateral from financing institutions and produce materials that are not standardised. Poor and substandard physical working environments as well as inadequate protective gear means that they are less advantaged when it comes to attracting customers to their establishments and are exposed to health hazards. Limited access to market opportunities is another hurdle that those engaged in informal businesses have to contend with.

The Rockerfeller Foundation puts the number of informal workers who live in extreme poverty around the world at 700 million people, contributing to their vulnerability to poor health. Most informal workers have few resources, which makes accessing health care a challenge as it requires leaving work, which reduces their income and adds to health care expenses. As alluded to above, some of the common problems that Informal workers face include poor working conditions which puts them at a high risk of getting injuries. Most employees in informal establishments have no sick time which accentuates their job insecurity, and a majority of them do not have health or social protection.

Another important element of the informal economy is small scale farming. There needs to be a more proactive approach geared towards making it a formidable employer as opportunities for growth in this area are immense. Making farming inputs competitively cheaper, as well as capacity development through the provision of access to technical services as is in the case of agricultural extension officers will go a long way in ensuring that small scale farmers attain higher quality yields. Another area that would be worth considering is that of supporting small holder out-grower enterprises that are in a dependent, managed relationship with an exporter. These include farmers who do not own or control the land they farm or the commodity they produce as they produce relatively small volumes on relatively small plots of land. A good example in this case is that of French beans farmers who sell their produce to horticultural export companies. This move will go a long way in improving product quality that will enhance the competitiveness of Kenyan produce in the export markets thus ensuring a sustainable and equitable growth in that sector.

 

An angle that clearly presents itself as far as the rapid growth of the informal economy is concerned is that of a focus on making the sector a formidable employer by raising the quality of its employment. This can be achieved by changing the societal stereotypes whereby students who pursue vocational training are seen to do so as a second option after failing to secure university admission. The role that tertiary institutions such as polytechnics play requires a keener rethinking in as far as their significance to the provision of a strategically skilled workforce for our budding industries in the informal economy goes. Also, training in financial skills is another key factor in building up these businesses in a way that they will be well equipped to manage their growth. By developing a culture of documenting financial dealings, informal businesses will be better placed to access loans and grants from financial institutions. Further, more can be done to make it easier for informal workers to access affordable healthcare.

There is increased recognition that much of the informal economy today is linked to the formal economy and contributes to the overall economy; and that supporting the working poor in the informal economy is a key pathway to reducing poverty and inequality. To maintain sustainable growth in this sector, there needs to be flexibility in the way government operates so as to accommodate and support a hugely untapped taxable avenue. Key issues that would have to be looked into revolve around the formalization and recognition of their business operations. That being said, given the proper support and plan, the informal sector in our economy will provide an avenue to the growth and development of indigenous industries.

 

litualex@gmail.com

Informal Economy Analyst.

How to develop partnerships between Formal and Informal Business

While exploring into some of the ways in which business linkages can be developed between formal and informal firms in a previous article, I looked into how both sides of the divide can take advantage of the opportunities within their realms to build symbiotic relationships. In this piece, I will highlight some of the approaches which formal firms should consider when trying to initiate and foster positive networks with the informal sector. 

https://i0.wp.com/www.dynamicbusiness.com.au/wp-content/uploads/2015/04/business-partnership.jpg

(Source:www.dynamicbusiness.com.au)

The first and foremost aspect that formal firms should look into is that of the business structure that is present in the informal business that they intend to partner with. The importance of ensuring that they establish this aspect is, among other factors to assist them in better understanding the client profiles of the clients serviced by the informal firm.  This will help them come up with tailor made marketing structures around which they can sell their products and services.

The other aspect that is of importance in as far as fostering beneficial relationships relates to the different levels of capacity present in the informal firms. These include, but are not limited to technical and financial skills. Most informal firms primarily under perform due the low levels of the above mentioned. Formal firms can work to improve the level of these skill sets which will go a long way in improving the quality of goods and services that they produce. Mentoring informal firms in this way will enhance their capability to deliver goods and services that are of a higher quality as well as enhance their systems of operation. This will further improve and strengthen the various aspects that are related to the operational systems of formal firms such as their chains of distribution.

Further, the longevity of an informal business should be a point of consideration when looking into partnership opportunities. One of the weaknesses that informal businesses have is that of shutting down after short periods of operation. The Micro Small and Medium Enterprises (MSME) Survey 2016 indicates that 46.3 per cent of the establishments were closed within the first year of operation. The trend in closing rate slowed down with the age of the business which points to the fact that informal businesses stabilized with time. On average, it was observed that the age of establishments at closure was 3.8 years.

Another area that would be worth exploring for formal firms as they seek to establish formidable links with informal businesses is that of targeting businesses that are part of an association. Micro, small and medium sized businesses that are members of associations within their realms of operation tend to be more focused and better organized. This is due to the fact that they draw valuable lessons from each other on best industry practices. These sort of associations provide a pillar of stability for informal businesses for it is through them that they can better interact with government bodies in cases of conflict resolution. Associations also give them financial security for it is through these that they can access loans to grow their businesses.

By looking into the above factors, formal firms can have a better understanding of informal businesses when trying to create partnership opportunities that grow their businesses. Working with the associations that informal businesses are a part of will enhance the capability of formal firms to choose credible businesses through which they can further harness their growth agenda.

litualex@gmail.com

Informal Economy Analyst

 

 

 

 

How to foster links between the Formal and Informal Economy

In a research paper published by the Kiel Institute for the World Economy (IFW) , the largest part of employment in Sub-Saharan Africa (SSA) is generated by informal enterprises. In Kenya, they account for 89.7% of the employment demographic. These enterprises often lack the financial means or the managerial and technological skills required to expand their activities. The paper goes on to point out that one way of overcoming these constraints is to establish links with the formal sector.

From a business perspective, linkages are channels through which enterprises influence each other’s performance in a relationship that ensures that they maximise benefits and minimise risks. The two major types are backward and forward linkages. The Business Dictionary defines backward linkages as channels through which information, materials and money flow between a company and its suppliers which creates a network of economic interdependence. Forward linkages on the other hand are the distribution chains that connect the producer or supplier with the customers.

(Source: http://www.smallbusinesscomputing.com/imagesvr_ce/6102/Collaboration_595)

IFW identified a couple of factors that encourage the formation of formal linkages. The first is that of primary production factors (capital stocks, employees), infrastructure (electricity, telephone), and access to credit. The expectation is that enterprises with higher endowments of the above are in a better position to establish formal linkages. Also, the experience as measured by the age of the enterprise is another factor. The expectation is that it takes time to build up business relationships hence enterprises that have been in business for longer periods are in a stronger position to form and exploit these linkages.

Another factor that influences the formation of linkages is that of the characteristics of the owner/manager of the enterprise (age, schooling). It points out that older and more educated owners are more likely to establish formal linkages. Being a member of a professional association also enhances the establishment of linkages. Contact with associations facilitates networking and thereby raises the likelihood of formal business relationships. This is fortified by the fact that these associations provide avenues through which businesses can share ideas on best work practices. They also provide an avenue through which the pooling of resources is encouraged, an aspect that strengthens their negotiating power.

The informal sector, when sufficiently supported, can gain a lot by pursuing this model of establishing linkages with formal businesses. The paper further suggests that formal backward linkages exert a positive influence on the productivity of enterprises in the informal sector. A symbiotic relationship of this fashion would be beneficial to both sides of the coin.

In addition, if formal enterprises are not able to procure goods from an independent supplier and lack the physical or human capital to produce the goods themselves, they will be restricted in their ability to introduce innovations to their production. More generally, it can be assumed that linkages facilitate the dispersion of technical innovation. 

Lastly, through the establishment of linkages with informal businesses, formal enterprises can take advantage of the markets that informal businesses have access to as a distribution channel for their products.

litualex@gmail.com

Informal Economy Analyst

 

 

The Role of Informality in the Kenya Industrial Transformation Programme 

The Kenya Industrial Transformation Programme (KITP) is an effort by the government to create an industrial hub in the country through sector specific initiatives in agro processing, textiles and apparel, leather, fisheries, services and SMEs (small and medium enterprises). With the SMEs sector being the fastest growing business segment of the economy accounting for 83% of the total employment demographic, I will highlight some of the strategies that have been proposed to make it more productive.

Image result for Kenya industrial Transformation Plan

(Source:https://issuu.com/kamkenya/docs/kitp_short_version_20150910__1_)

Some of the challenges that the sector faces include a lack of understanding of basic business practices such as book keeping and marketing. These limit their growth when it comes to accessing finance to expand their operations for they are seen to be high risk clients by financial institutions. The recent interest rate cap has negatively affected them as fewer can access loans from banks. Their level of human capital is also low due to a lack of formal education amongst most of the workers engaged in the sector. Most SMEs also have little knowledge of other markets which puts them at a disadvantage when it comes to approaching the export market.

Proposed initiatives in KITP aimed at uplifting the sector include the setting up of a fund to provide low cost financing to SMEs. The fund is to be set up as a credit guarantee system or as an investment in private equity funds with contribution from both government and development finance institutions. It is targeted at those SMEs with promising business plans as well as those that demonstrate potential for growth. 

The strategy also plans on establishing communication and training between large companies and SMEs so as to facilitate subcontracting. This move is meant to increase the share of large corporations in the country sourcing from local SMEs to 30%, while building the capacity of SMEs to meet these needs. This will also look into ways of  improving the capacity of the large companies to identify and manage suitable SMEs.

Another intervention is that of enhancing MSE’s (Micro and Small Enterprises) competitiveness. This will be done through a competition in every county where 5 products from entrepreneurs engaged in the manufacturing and agribusiness sub sectors will be selected to have their products available on supermarket shelves. The process will involve conducting quality, packaging and branding training to get their products certified by the Kenya Bureau of Standards (KEBS). The winner of this competition will receive a prize of Kshs 1 million aimed at improving their operations.

Further, there are plans to establish a metal fabrication centre of excellence in Kariobangi, Nairobi, aimed at upgrading the existing Jua Kali metal fabricators by providing common user facilities, training programmes and incubation facilities. This will improve the quality and quantity of the products that these artisans produce, as well as equip them with technical skills which will include knowledge on how to operate modern machinery.

The KITP should not be one of those policy documents that are drafted, launched and eventually gather dust on the shelves of libraries and institutions. It is a noble initiative that needs to be fast tracked and implemented as it will translate to the improvement of the lives of the millions of Kenyans that are engaged in micro, small and medium sized economic activities.

litualex@gmail.com

Informal Economy Analyst