So we've lived in a small home ever since we've had kids. This has meant lots of creativity, clutter purging, and organization. In our current home, we have a small 4-drawer dresser for my 2 older kids' clothes. Unhelpfully, my older daughter is a total fashionista and LOVES clothes, and we get lots of hand-me-downs. This leaves me needing to fit a LOT of clothing into a small amount of space. This is the best way I've found to do it.
For the shirts, first fold the sleeves back, and then fold the shirt in half, like this:
Pants are similar. Folded like this:
And then stacked in the drawer like this:
Even when we have more dresser space, I think I'll still organize the kids' clothes this way, because I love that they can see each thing in their dresser. They wear a bigger variety of their clothes, and don't tear their drawers apart looking for a specific shirt. My kids love it too!