Having suffered high levels of poverty during most of the 1970s and before, China was able to successfully chart its own market reforms instead of following Western advice, which was mostly wrong.
Unlike Zimbabwe, at the beginning of its transformation, China had no foreign debt and was therefore not obliged to take reform advice from creditors.
Among other strategic moves in reforming from a socialist economy to a successful industrial market economy, China systematically and gradually merged and privatised state-owned enterprises, thus avoiding mass unemployment.
Foreign private firms were allowed to be established in the country under favourable conditions of ease of doing business and cheap labour, allowing further employment opportunities for citizens.
China’s unique brand of economic growth includes embedding small and medium enterprises through dynamic changes in economic policies.
The major cause for Chinese interest in developing small and medium enterprises was the high level of poverty rates, coupled with the fact that well over 80% of the population lived in rural areas.
Once industrialisation reforms commenced, rural youths were allowed to migrate to urban areas and offer cheap labour.
However, much of the population remained in rural areas and the government developed sustainable economic solutions for that population.
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For example, township and village-based enterprises were supported by local governments, a phenomenon known as the local entrepreneurial state.
Chinese policies also allowed small state-owned enterprises to be sub-contracted, managed and even bought out by entrepreneurs, as well as developing joint ventures and shareholding cooperatives among small scale entrepreneurial activities.
Resultantly, small and medium enterprises enjoyed community risk sharing, pooled profits, soft credits from local financial institutions, and a collective land system that afforded an added insurance function.
To date, China seeks to further develop small and medium businesses. In August 2023, the Ministry of Finance and State Taxes Administration extended preferential tax policies to the end of 2027.
These include corporate income tax incentives for small and low-profit enterprises, value-added tax (VAT) exemptions, reduction of six taxes and two fees for small-scale taxpayers, small and low-profit enterprises and individually-owned businesses, among others.
Some of the impacts of reduced taxes on small businesses are reduced tax burdens, channelling of revenues to recapitalisation, growth and expansion, as well as an increase in employment as businesses can afford to hire more human resources.
To date, SMEs make up 99% of all enterprises in China, accounting for at least 60% of the country’s GDP and responsible for 82% of employment.
The government of China continues to promote policies and programmes that support SME operations.
Zim’s current environment
The cost of living in Zimbabwe continues to rise amid soaring mass unemployment due to corporates giving in to unfavourable economic conditions, high levels of poverty and abject poverty, sunken social protection services and increasing school dropout rates.
The small business sector continues to rise predominantly, fostering informal businesses. As in the case of China, Zimbabwe’s small and informal business is a result of high unemployment rates and desperately poor standards of living for the majority of the citizens.
Zimbabwe’s current debt sits at over US$21 billion and is expected to increase to over US$36 billion by 2030. This means creditor influence on the country’s financial architecture through instruments such as the Staff-Monitored Programme from the International Monetary Fund. Such tools, including the Structural Adjustment Programme, prioritise debt repayment over social protection and improved economic standards for Zimbabweans.
Due to the macro-economic volatility, currency instability, and complex regulatory environment, the country has witnessed an unfortunate mass exodus of large corporations, further increasing unemployment and reducing the tax revenue base. The burden of revenue collection through taxes and fees is mainly borne by the informal sector. The government has implemented various regulatory measures aimed at fostering compliance and supporting formalisation of the informal sector.
However, the cost of formalisation seem to deter many informal businesses from compliance and investment in small informal businesses has not made significant changes to perceived cost of formalisation. Zimbabwe’s rural population accounts for 67,5% of the total population with over 70% living in poverty.
Currently, predominant economic activities in rural areas are small-scale farming and artisanal mining. Through the Rural Development 8.0 initiative and other International Fund for Agricultural Development programmes, small businesses have benefited from capital resources such as boreholes, irrigation schemes and agricultural training.
Major challenges that pose bottlenecks for effective implementation of these programmes include an uncertain economic and regulatory environment that makes these programmes unsustainable, lack of coordination between government agencies and most importantly, climate change which affects the economy and limits funding and consistent support towards small-scale farmers.
Lessons
High debt levels have a negative impact on the efficient contribution of small businesses into the economy due to insufficient government investment support.
Revenue collection (taxation) from small businesses should follow investment and growth measures in the sector to enable companies to realise profits, grow, and subsequently afford taxes.
Zimbabwe’s current macro-economic and regulatory environment is highly difficult and volatile, thus repelling foreign investment. Urgent reframing of economic policies is needed to foster investment opportunities, a safe and lucrative business environment, and trust in the country’s financial system.
Addressing issues of social vulnerability, especially in the rural areas, allows for the country to effectively implement decentralised development in the economic and social service sector.
Jaravaza is an independent policy analyst. These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Limited, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe. — [email protected] or mobile: +263 772 382 852.
