http:// ccs.tsinghua.edu.cn [email protected]u.cn Angang Hu Angang Hu Center for China Study Center for China Study Chinese Academy of Sciences Chinese Academy of Sciences Tsinghua University Tsinghua University May, 2006 May, 2006 The Emergence of Informal The Emergence of Informal Sector and the Development of Sector and the Development of Informal Economy in China’s Informal Economy in China’s Transition: A Historical Transition: A Historical Perspective (1952-2004) Perspective (1952-2004)
Chinese Academy of SciencesChinese Academy of Sciences
Tsinghua UniversityTsinghua University
May, 2006May, 2006
The Emergence of Informal Sector and the The Emergence of Informal Sector and the Development of Informal Economy in Development of Informal Economy in
China’s Transition: A Historical Perspective China’s Transition: A Historical Perspective (1952-2004)(1952-2004)
China employment model is experiencing a process of large scaled Informalization. The Chinese academic circles have made useful explorations into this process and resulted in a number of basic consensus. But still, there are a lot of problems that need in-depth discussions.
The core problems discussed here are: What changes, on earth, does the urban Informal
employment undergone since the founding of the People’s Republic of China? What scale did it reach during different periods of time?
What changes has the output value of urban Informal economy undergone? What are its contributions to the non-agricultural GDP during different periods of time? What has contributed to these changes?
How have the Informal employment and sectors of the economy changed since reform and opening up, especially since the beginning of the 1990s?
What scales have the urban self-employed, private businesses and rural migrant workers reached?
Our main discoveries are: China’s urban Informal employment has assumed a trajectory of
U turn – first plummet, then gradually rise – from the time of the founding of New China to the present.
The same is true with the changes in the proportion of urban non-Formal economy in the non-agricultural GDP.
In the process of such U-curve since the 1990s, the movement of rural labor encouraged by a series of government policies has reached an unprecedented scale, making the most contributions to the rise of the U curve.
Correspondingly, China’s public sector (or traditional Formal sector, such as state-owned and collective units) has assumed a reversed U-curve development (See attached figure 1-4).This is a true reflection of the transition from “nationalization” to “de-nationalization”, where policy guidance and institutional arrangements have played a prominent role.
Besides, China’s urban Informal employment has developed rapidly since reform, especially since the beginning of the 1990s to become the main channel for creating new jobs and a fundamental motive force for accelerating urbanization. In 1990-2004, China’s urban new employment was 94.35 million,
averaging an annual growth of 3.2%. In the same period, the urban Informal employment increased by
125.55 million people, 133% of all the increased employment, averaging an annual growth of 12.5%, the fastest growth in the world. This has also revealed why China’s economic growth is the fastest in the world.
What is Informal employment? We defines informal employment as incorporating
three kinds of people: the people employed by private enterprises in cities, self-employed and employees, mainly rural migrant labor in informal employment not covered by national statistics. The former two have statistical data while the last one lacks statistics. The authors use the difference between total employment and employment covered by statistics as the estimated figure.
Source: Tabulated by the authors.
Main features of foreign informal sector Main features of Chinese informal sector
Belonging to the biggest part of unregistered or recorded by official statistics ， with simple organizational setups ， easy to get into and operate ， with a low level of capital, income and labor productivity ， usually engaging in dispersed and small scale activities.
It refers to self-employed and private sector and unregistered rural migrant workers, with relatively simple organizational structure, easy to get into and operate. Compared with traditional service industry ， the rising industries, such as information industry ， their technical level, labor productivity and income are high.
For the purpose of survival and get jobs rather than for profit maximization.
For the purpose of survival and getting jobs, mostly not seek profit maximization. There are also traditional social and cultural factors.
Labor relations based on ad hoc or kinship and individuals and other social relationship instead of on legal contractual relationship.
Social relationship based partly on kinship and individuals and partly on labor service contractual relations.
Not subject to government regulation and management ， not recognized, supported, protected and managed by the government and sometimes subject to interference and curtailment by the government as illegal activities.
Subject to the regulation and management by the government, encouraged, supported and managed by the government, different from illegal activities. It is treated as part of the national economy and encouraged to develop together with formal sector of the economy.
Table 1 Comparison of Chinese and Foreign Informal Sectors
A. Changes in employment model – Analysis of the general situation of informal employment
First, the urban informal employment assumed a high-speed growth, far outgrowing the urban employment.
Second, informal employment is the biggest contributing factor to urban employment growth. It has also offset the number of jobs destroyed by traditional formal sectors. ——China’s informal employment has increased rapidly since 1995
and the number of jobs created has far exceeded those destroyed by traditional formal sectors and that is the main factor accounting for the net increase in urban employment.
Third, the proportion of informal employment in the total urban employment rose rapidly, with the employment structure going irregular.
Table 2 Contributions by Urban Informal Employment Growth to Newly Increased Employment （ 1949-2004）Urban employment
IV. Analysis of the General Situation of China’s Informal Economy
This paper defines urban informal sectors as (1) individual economy, which mainly refers to individuals
engaging in industrial and commercial operations whose total production value created is incorporated into the national statistics. But due to its high flexibility in management, it falls into the category of partially covered by statistics;
(2) Private sectors, which refer mainly to medium-sized and small enterprises that are basically covered by national statistics;
(3) Economies not covered by national statistics, especially the part that employs rural labor that is not covered by official statistics (See Table 3). This means that China’s GDP figures is far lower than its real value.
Source: Tabulated by the authors.
Foreign Chinese
Scope OECD ： Unobserved economy;
US IRS ： Economy not declaring legal and non-legal income ；US GAO ： Economy escaping measurement and observation ；Feige （ 1989 ）： Cost ignored in property right relations, business license, labor contract, fiscal credit, social security; activities not protected by management principles and law.
（ 1 ） Self-employed ；（ 2 ） Private economy;
（ 3 ） Unobserved economy.
Source of employment
（ 1 ） Mainly foreign immigrants ， such as in the USA ；（ 2 ） Mainly local women and children ， such as in Italy ；（ 3 ） Domestic migrants ，such as Latin American countries.
（ 1 ） Individuals engaged in industry and commerce ；（ 2 ） Medium-sized and small enterprises ；（ 3 ） rural migrant labor.
Government attitude
Pays little attention and sometimes regards it as illegal economy.
Encourages, support and manage it so that it develop simultaneously with the formal sectors.
Table 3 Comparison of Chinese and Foreign Informal Economy
IV. Analysis of the General Situation of China’s Informal Economy
Since reform, especially since the beginning of the 1990s, China’s informal sector has exhibited the following characteristics:
First, the growth of urban informal sector has far exceeded that of the national non-agricultural economy (even higher than the national economic growth), creating a world economic growth record.
Second, the high-speed growth of urban informal sector has made increasingly big contributions to national new non-agricultural GDP to become one of the most important sectors of the national economy.
Third, the informal economy has developed rapidly, with its proportion in non-agricultural GDP rising steadily to 1/3 in 2004
Table 4 Output Growth of Urban Informal Sector to National New Non-agricultural GDP （ 1952-2004） ª
Note ： a. Calculated by comparable price. b. From 1990 to the present ， the private sector ha
s developed from scratch and has grown rapidly. Calculated by comparable price ， the total output value growth of the private sector in 1990 － 2004 was 124.34 times ， averaging an annual growth of 43.46 ％ . The figures from the State Administration for Industry and Commerce show that the total output value of private enterprises was 12.176 billion yuan in 1990 ， 2305 billion yuan in 2004 ， 189.3 times that of 1990 ， averaging an annual growth of 50.37 ％ . See Office of the State Administration for Industry and Commerce, compiled, “Collection of Statistics” for all years.
IV. Analysis of the General Situation of China’s Informal Economy
In 1990-2004, the proportion of added value of urban individual sector in the national non-agricultural GDP rose from 4.4% to 10.3%; that of the private sector, rose from 0.4% to 12.2%; that of the unregistered sector, rose from 4.3% to 14.4% (the added value of the unregistered informal sector in the national GDP rose from 3.6% to 13.3%),[1] close to the proportion of agriculture in GDP (15.2%). But the agricultural labor was 352.69 million, which means the GDP created by about one million urban peasant-workers is close to the GDP created by 350 million farm laborers. Obviously, the massive migration of rural labor has not created non-agricultural jobs but also raised labor productivity and income level.
[1] We have estimated that such proportion has not been included in the national GDP.
IV. Analysis of the General Situation of China’s Informal Economy
The main factors accounting for the high-speed growth of the urban informal sectors, according to our analysis, are: First, the labor productivity of private and individual economies is high (calculated according to national non-agricultural labor productivity), which has produced structural effect; second, employment level of the informal sectors is high. The two factors have the multiplying effect.
Besides, what needs to be pointed out is that the high growth of urban informal sectors is highly associated with the high growth of human capital in the informal sectors.
V. Main reasons for the rapid developV. Main reasons for the rapid development of China’s informal employmentment of China’s informal employment
1. From the historical perspective, China’s economic structure was of non-state owned at the beginning of the founding of New China and, in the course of coercive institutional changes, radical nationalization was carried out and, on this basis, a highly centralized planned economy was established.
2. From the practical perspective, the transition to the informal employment is the result of the mutual action based on the five major motive powers for economic structural adjustments.
V. Main reasons for the rapid devV. Main reasons for the rapid development of China’s informal empelopment of China’s informal emp
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There are by and large five parallel trends in the current economic adjustment and transition:
(1)The economy operates according to market rules, thus stimulating the formation and establishment of labor market, accelerating the movement of labor and intensifying competition in employment;
(2)De-nationalization of ownership structure has given the incentives to the development of not only non-public formal sectors (such as foreign-funded enterprises, limited liability companies, joint stock companies, joint stock cooperatives) but also non-public (private and individual) and other informal employment growth;
(3)The non-agriculturalization of economic structure has accelerated the pace of the movement of rural labor to non-agricultural activities;
(4)Urbanization of population has quickened the pace of the massive transfer of rural labor to cities.
(5) Internationalization in the context of globalization, China first established an outward-looking economy and then an open economy, thus stimulating the development of labor-intensive product export and the development of associated industries.
V. Main reasons for the rapid devV. Main reasons for the rapid development of China’s informal empelopment of China’s informal emp
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What needs point out is that the transition of China’s employment model is a process of mutual influence, mutual action and going parallel with the transition of five other aspects.
In the 11th national economic and social development program, employment is treated as one of the major problems that affect development and put forward the objectives to achieve. In 2006, the government has produced a number of policies concerning re-employment, rural migrant labor and the development of self-employed, private and other non-public sectors of the economy. It can be anticipated that, with the policy encouragement and guidance, China’s economy would continue to maintain at a high speed and the output of Informal departments has a great potential in its contributions to the non-agricultural GDP, likely to reach about 50%.
1. Developing informal economy is the secret of creating more jobs and stimulating economic growth.
2. The most prominent feature of transition is the development of informalization.
3. The feature of China’s transition and de-formalization is uniqueunique in the world.
The unique features lie in:
(1) From nationalization to de-nationalization, China’s economic system and social structure has experienced a self-revolution, self-negation and self development.
Institutional self-revolution shows that the current de-formalization” is not the continuation and revival of the model at the beginning of the founding of New China; neither is it its simple repetition, but regeneration under the new historical conditions.
Institutional self-negation process indicates that informal employment, starting from have to not have and back to have, reflects the profound reflection and summation of the mainstream ideology of China concerning the history of development and reflect the courage to challenge the drawbacks and conflicts brought about by institutional arrangements, courage to recognize errors and make improvements.
The institutional self-improvement process shows that “de-formalization” is the development regression of the co-existence of multiple sectors of the economy on the basis of history and therefore the informal sectors have, during the transitional period, exhibited the development trend of diversification at the beginning of the founding of New China, that is, a U-curve.
(2) Radical nationalization is a unique process and so is the gradual process of de-nationalization.
(3) China’s transition is massive in scale and rapid in speed, but varies unevenly.
(4) The historical transition in five major aspects has appeared almost simultaneously and they act upon each other, having an unprecedented driving effect on economic development. Under the impact, China’s informal employment has developed at an alarming rate and so has the inf
4. The government plays a double-edge sword role in the transitional de-formalization, making state policies the most important variables in the development of different periods.There are two mechanisms that provide the incentives for i
nformal employment: One is that both the central and local government produced incentive policies to guide its development. The other is all informal sectors have their own incentive mechanisms. For instance, in the process of rural labor migrating to cities, the proportion of the movement of whole family has increased. The two aspects of incentive mechanism are mutually accommodated and mutually complementary.
It is necessary to note that the development of informal employment in the individual and private sectors of the economy is in a relationship of complementarities and competition with the formal sectors of the state economy. Informalization shows that China’s economic players are being diversified and pluralized instead of replacing the formal economy. Otherwise, it would go to the other extreme of historical development.
