The Development Process of Rural Informal Industries in Developing Countries: the Case of Bangladesh

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THE DEVELOPMENT PROCESS OF RURAL INFORMAL INDUSTRIES IN DEVELOPING COUNTRIES: THE CASE OF BANGLADESH

Khondoker Abdul Mottaleb
Social Sciences Division
International Rice Research Institute, Philippines

Tetsushi Sonobe
GRIPS, Minato-ku, Tokyo, Japan

ABSTRACT

While the role of rural informal industrial clusters in generating income and employment opportunities for the rural poor is widely acknowledged, studies seldom examine the growth process of informal industries in developing countries. Particularly, studies seldom examine why many of the informal industrial clusters in developing countries perform poorly relative to their growth potential. Using primary data collected from entrepreneurs and workers from an informal hosiery cluster in a northern district in Bangladesh, this paper explains the factors that influence the development process of informal industries in rural areas in developing countries. The paper empirically identifies that entrepreneurs’ human capital acquired through formal education critically determines product quality upgrading efforts, formal credit accessibility by the entrepreneurs, and the performance of enterprises.

JEL Classifications O14, O15, L25, L26
Keywords: informal sector, industrial development, human capital Corresponding author’s email: k.mottaleb@irri.org

INTRODUCTION

According to the World Bank (2010), around 1.4 billion people in the world are extremely poor, living on less than USD1.25 per day, and the majority of these extremely poor people reside in rural areas in South Asia and Sub-Saharan Africa. How to eradicate extreme poverty in rural areas has been a major item on the development agenda of these countries. The development of industries can be a crucial alternative avenue to eradicate extreme poverty rapidly, as the development of industries allows the generating of immense employment and income opportunities for the poor (e.g., Hayami et al., 1998; Otsuka et al., 2009; Rosegrant and Hazell, 2000).

Particularly, the successful experience of East Asian countries, such as China, Taiwan, Korea, and Vietnam, vividly demonstrates that the transformation of informal industries in the rural areas in developing countries is instrumental to eradicating extreme poverty (e.g., Sonobe and Otsuka, 2006; Nam et al., 2009). For example, it is widely recognized that China has been tremendously successful in eradicating rural poverty through the development of township and village enterprises (TVEs) since the 1990s (e.g., Heston and Sicular, 2008; Sonobe and Otsuka, 2006). The fact is, informal industries pervasively exist in developing countries, and their contribution to developing countries’ economies is widely recognized (e.g., Ranis and Stewart, 1993; Weijland, 1999; Lanjouw and Lanjouw, 2001; Daniels and Mead, 1998; Macias, 2010; McPherson and Rous, 2010). For example, in Bangladesh around 40 percent of the total working labor force is engaged in non-farm economic activities that include informal industrial activities (Hossain, 2002), and in Mexico, since the late 1980s, the contribution of the informal sector that includes informal industrial activities has been 30 percent of GDP (Macias, 2010).

Ironically, despite their enormous contribution to poverty alleviation and economic development, informal industries in developing countries seldom grow in terms of product quality and number of workers. Most of the entrepreneurs and workers engaged in informal industrial activities tend to be poor, and tend to be delinked from formal information and technological support (e.g., Sonobe et al., 2011; Altenburg and Meyer-Stamer, 1999). With a few exceptions, most of the informal industries simply expand in terms of the number of entrepreneurs with little or no upgrading in product quality, and thus perform poorly relative to their growth potential. The question arises as to how poverty-stricken developing countries can transform rural industries into vibrant...
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