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.

 

 

 

Informality In Sub-Saharan Saharan Africa

The latest Regional Economic Outlook: Sub-Saharan Africa is a survey conducted and released twice a year by the International Monetary Fund (IMF). The latest was made public in April 2017 and highlights the importance of the informal economy as being a key component of most economies in Sub-Saharan Africa, contributing between 25 and 65 percent of GDP and accounting for up to 90% of jobs outside agriculture. This includes household enterprises that are not formally registered.

(Source: https://www.imf.org/~/media/Websites)

Estimation of the size of the informal economy is done by looking at indicators such as the tax burden, institutional development and unemployment rates amongst other factors. According to the paper, a larger tax burden is likely to encourage more economic activity to remain in the informal economy. The level of institutional development is another indicator whereby the lack of respect for the law encourages informal activity. Higher unemployment rates are an indicator of poorly functioning labour markets with labour not being absorbed into the formal sector.

The IMF indicates that the average share of informality in Sub-Saharan Africa reached almost 38% of GDP during 2010 – 2014. This is surpassed only by Latin America and the Caribbean at 40% of GDP and compares with 34% of GDP in South Asia, and 23% of GDP in Europe. In member countries of the Organisation for Economic Cooperation and Development (OECD), the informal sector is estimated to account for 17% of GDP. Their findings suggest that informality seems to fall with the level of income, likely reflecting higher government capacity and better incentives towards formality in higher income economies.

In terms of the experience of its populations as entrepreneurs, Sub-Saharan Africa has the highest rate of early stage entrepreneurial activity. However, about a third of the new entrepreneurs in the region report that they chose to be entrepreneurs out of necessity. Despite this, the region has the most positive attitude towards entrepreneurship. The policy change proposed in this regard is to create an environment in which small firms in both formal and informal sectors can thrive and grow, one that is supportive of SMEs.

As far as informality and productivity is concerned, high levels of informality in the informal sector have significant implications on productivity. This in turn negatively impacts economic performance. The paper draws certain conclusions from World Bank Enterprise Surveys which indicate that the productivity levels of informal firms are significantly lower than those of formal firms. On average, the productivity of informal firms is only 25% of small formal firms and 19% of medium sized formal firms, based on real output per employee. This reflects a lower level of physical capital and skill levels of informal workers.

In regard to tax policy, the document proposes that relatively high VAT thresholds are recommended for developing countries, with licences and fees for businesses below the VAT threshold. Such a move would reduce the number of small businesses that are discouraged from registering with the tax administration. As a result, the increased growth and transition into formality would allow small enterprises to grow to a size above the tax threshold, generating higher fiscal revenue. The benefit for formalisation would be better access to finance and public services, which would exceed the tax cost.

Moving forward, countries in the region need to focus on developing strategies that will not only foster and support the positive growth of informal sector activities, but also go further to incentivise their graduation into the formal sector. The importance of capacity building initiatives in the areas of technical, financial and management skills as well as those that are centred around technology adoption as a means to increasing their productivity cannot be overlooked if this is to achieved.

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

Supporting Economic Transformation through Informal Economy

 

Last week, the Kenya Association of Manufactures (KAM) in association with the Overseas Development Institute’s (ODI) programme, Supporting Economic Transformation (SET) launched the Ten Policy Priorities for Transforming Manufacturing and Creating Jobs in Kenya. The document is a ten-point policy plan aimed at creating 300,000 jobs and doubling manufacturing in five years. According to the document, this will be achieved through two main ways;

(Source: http://www.kam.co.ke/KAM-2016/wp-content/uploads)

  1. The formulation of effective public policies and the regulation for manufacturing competitiveness by doing the following;
  • Creating a business environment that is conducive to manufacturing investment.
  • Enforcing a fiscal regime that supports manufacturing.
  • Making land ownership more affordable and accessible.
  • Securing affordable, reliable and sustainable energy.
  • Expanding access to long-term finance for all types of manufacturing firms.
  • Creating an exports push for manufactured products.
  • Developing worker skills as well as supporting innovation for increased labour productivity.

 

  1. Efficient and effective implementation through;
  • Creating a fit-for-purpose public service.
  • Developing a coordinated value chain approach.
  • Building trust and reciprocity for effective coordination and partnerships.

There is a proposed plan to inclusively target Informal industry or cottage industries. According to the document, there are several manufacturing sub-sectors such as agro-processing, metal works, furniture, and leather and shoe making. Following earlier research that has been carried out on the informal manufacturing sector in Kenya by Deloitte and The World Bank, four sub sectors have been singled out as having the greatest potential for growth and performance. The first is the arts and crafts which consists of homemade artefacts that are a popular product for tourists and residents.

The other strong informal manufacturing sub sector is that of furniture. The furniture market in Kenya stood at approximately $496 million in sales in 2013, whereby East African economies purchase $1.2 billion worth of furniture annually. Jua kali represent more than a third of sales in Kenya ($160 million). The jua kali furniture industry exhibits strong growth and manufactures world class ethnic furniture for niche markets in areas such as Lamu.

The third is the metal works informal manufacturing sector which produces a range of products such as charcoal cooking stoves, buckets, pans, kitchen utensils, wheel barrows, watering cans, gates and grills, and small tools for low-income clients. Products such as industrial sculptures and artworks target higher-income clients. Additionally, a few informal manufacturers produce a limited number of spare parts such as silencers, auto upholstery, and rubber bushings.

The last one is the leather industry under which the informal sector accounts for 10,000 of the 14,000 workers. Kenya is the third-largest livestock holder in Africa, so leather represents a potential area for economic growth and employment. In 2017, the Ministry of Industry Trade and Cooperatives (MITC) committed a KSh 130 million revolving fund for SMEs in the leather industry to build workspaces in all of the country’s 47 counties.

The ten-point plan further points out that despite this potential, there are challenges that the informal sector faces which include access to finance, limited access to land, corruption and labour productivity. With the successful implementation of this document, the informal manufacturing sector stands to immensely benefit from the catalysis of manufacturing in Kenya.

litualex@gmail.com

Informal Economy Analyst

The Role of Informality in Urbanization and Industrialization

The Economic Report on Africa 2017 was released by The United Nations Economic Commission for Africa(UNECA). This year’s report looked into ways in which the continent can harness industrialization to better structure the fast pace at which urbanization is taking place. Given that Africa is the fastest urbanization region after Asia, the report puts emphasis on the fact that only under the right policy frameworks can this momentum be leveraged so as to accelerate industrialization.

Image result for urbanization and industrialization africa

(Source: http://www.uneca.org)

Some of the proposed measures point to ways in which informal businesses can be made a part of this process. One such measure was to bank on the links between informal and formal sectors, for these are mutually beneficial and dependent. Those involved in industrial land use planning should consider the needs of informal enterprises, given their importance for job absorption and the challenges they often face in finding adequate premises for work.

One option is to try to meet industrial firms’ location-specific needs through Special Economic Zones (SEZs) and industrial zones. These will bring the most benefits if they are well connected to the urban economy, including the informal sector firms that can provide low cost inputs and use linkages as a path to growth and formalization. SEZs present opportunities for co-investment by formal firms and the public sector in infrastructure and technical and vocational education and training, which can broaden participation in economic growth and provide avenues for inclusion of critical workforce groups such as women and youth. These links to markets and skilled labour are critical.

The report further states that studies suggest that informal operators benefit from clustering through the various sectors in which they operate, and that they generally have a positive impact on their formal sector counterparts. It is with this in mind that agglomeration economies should be considered in the context of locational policies related to the informal sector and a path to formalization. Agglomeration economies can benefit the informal sector particularly through proximity to suppliers and purchasers.

Also, low-tech, labour-intensive infrastructure projects accessible to SMEs are a major opportunity for urban job creation. Lower-skilled labour-intensive technologies have high potential in some public investment sectors, including roads. A good example is that of Ethiopia whereby between 2005 and 2008 through a cobblestone roads and pavement programme, more than 90,000 jobs for young people were created. This led to the establishment of 2,000 small and medium enterprises. The project included backward linkages to domestic inputs—cobblestones—and labour-intensive skills in quarrying, chiselling, transporting and paving. The programme, implemented in 140 towns and villages, built around 350 km of road.

In terms of access to finance, Sudan has taken steps to improve this for industrial firms, including SMEs. Policy efforts in 2013 simplified the regulatory framework for financial access and new bank branches, and the central bank made preparations for mobile banking. These reforms targeted small enterprises, which make up 93 per cent of manufacturing firms, by requiring that commercial banks set aside 12 per cent of resources for microfinance. It is with this spirit that African countries must leverage the force of urbanization to drive and enable industrial development for a prosperous and equitable future.

litualex@gmail.com

Informal Economy Analyst

 

Poverty mitigation through the Informal Economy

Poverty in Africa has for long been a problem that successive governments have grappled with. Different policies have been drafted and implemented to curb this menace with little impact. Most of these have been centred around job creation policies that have not achieved the desired goals. This is due to the short-term implementation programs which do little to change the lives of those that are targeted.

(Source: http://www.povertyactionlab.org/sites/default/files)

In an attempt to earn a living, those that are trapped in the poverty world look towards various avenues to sustaining themselves as well as providing goods and services that are affordable to the communities in which they operate. The high demand for low quality goods that are often not standardised further makes it difficult for them to sophisticate their operations. This demand and supply factor has seen a rapid growth rate in the size of the informal economy.

Considering that micro and small businesses are set up as a means of making money to get by, it comes as no surprise that the Micro Small and Medium Enterprises 2016 Report, a survey by the Kenya National Bureau of Statistics (KNBS) indicates that the three main reasons the operators of unlicensed businesses establish businesses were due to the lack of another alternative (23.8 per cent), pursuit of better income (23.5 per cent) and a preference for self-employment (13.1 per cent).

Due to the fact that most of these businesses are haphazardly set up, amongst other factors, a vast majority of these businesses have a short life span. The survey noted that 2.2 million small businesses shut down within the last five years. This is 46.3% of the total number of informal businesses. A substantial number of people who establish these sorts of ventures do so without prior knowledge of the fields that they get into with the main objective of starting the business being self-sustenance.

The lack of proper business operational structures as well as insufficient sources of finances to upscale accentuates this problem. As per the survey, the main source of capital for both licenced and unlicensed micro, small and medium enterprises (MSMEs) was through personal and family financing which accounted for 76.3% of these businesses. Access to capital to further grow their businesses is a big obstacle for small businesses. Most of them do not possess business plans due to the random way in which they are established. As mentioned earlier, the absence of internal business structures such as the unavailability of financial records makes it difficult for financial lenders to calculate their level of risk and are hence often turned away.

Policy makers need to dig deeper so as to come up with viable and long-lasting solutions to reduce the rampant poverty levels. A good place to start would be by looking into ways in which they can strengthen informal businesses for they are at the heart of the ecosystem of poor communities. Programs that target these sorts of businesses should focus on building their capacity in the areas of business and financial skills in a way that fosters their long term growth and development.

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