Constraints to growth in informal sector activities and formalisation: A case study of Ghanaian slums

Abstract

Background: Globally, people often migrate from rural to urban areas in search of employment. Lack of adequate employment opportunities in cities forced individuals to engage in slum informal economic activities out of necessity.Aim: The informal sector presently employed about 86% of labour in Ghana, contributing 42% to its gross domestic product (GDP). Various constraints held back the development of slum informal activities. Formalising the informal sector is advocated as a step to generate employment. This article investigated the dynamics of informal sector activities and formalisation among slum operators in Ghana, based on a survey in two major cities there.Setting: This article investigated the constraints that hinder the development of slum activities in Accra and Kumasi, two cities in Ghana, and examined the informal operators’ subjective well-being and their willingness to graduate to the formal sector, should the constraints be addressed.Methods: Data were collected by means of a questionnaire, administered to a random sample of 342 informal slum operators. Enterprise constraints are examined by using the principal component analysis (PCA) method and the likelihood of the informal operators’ graduating to the formal sector by using logistic regression.Results: The PCA identified six clusters as limitations, explaining about 77% of the variation in constraints. These related to a lack of business knowledge, credit access, tools and materials, security and social networking. The logistic regression results reflect that, of all the constraints, it is only when access to capital is addressed, that slum operators will move into formal activities.Conclusion: When people are happy in what they are doing, they are reluctant to move to the formal sector, despite incentives or interventions that address their enterprise constraints. Hence, slum operators and informal activities are unlikely to disappear. Nevertheless, policy-makers have to devise appropriate financing strategies for slum operators to help in their formalisation and growth pathways.

Determinants of the Level of Informalization of Enterprises: Some Evidence From Accra, Ghana

“…It is similarly the case in Ghana, the subject of this paper. Osei-Boateng and Ampratwum (2011) estimate that 80 percent of Ghanaian workers are in the informal economy and by 2018, this was estimated to be 86 percent (Mahadea and Zogli, 2018), with similar magnitudes in other studies (Adom, 2014;Adom and Williams, 2012). Meanwhile, the Ghana Statistical Service estimate that out of the GH¢256 billion total GDP in 2017, GH¢73.3 billion (28.6 percent) is from the informal economy.…”

Informal Sector and Tax Compliance in Nigeria- Challenges and Opportunities

“…In addition, Mahadea and Zogli (2018) studied constraint to growth in informal sector activities and formalisation. The study revealed that informal sector operators' contentment with their business activities, leads to reluctant feeling of transformation of business activities to formal setting, despite government encouragement, intervention and incentives packages provided to address enterprises constraints.…”

“…Joshi, Prichard, and Heady (2014) opined that informal sector is seen as a type of business in subsistent economy. In Ghana, informal sector has 86% of labour employment and 42% contribution to the nation GDP (Mahadea & Zogli, 2018). In Nigeria, informal sector also contribute a lot to the country's GDP and has continue to act as avenue for job creation than the formal sector.…”

The Informal Sector and Economic Growth of South Africa and Nigeria: A Comparative Systematic Review

“…Generally, the informal sector (consisting of unpaid workers in family enterprises, casual wage employment, home-based worker or service providers, street vending) are the means of survival for poor people in slums [7], and people exposed to natural disasters or acute urbanisation from rural settings. This is also prevalent when there are slower growth and cycles of a downturn in the economy, resulting in fall of the national GDP.…”

“…The importance of the informal sector (viz., grey/shadow economy) acting as "conduits of employment" for the provision of products/goods and services has been acknowledged by several authors [1,7,10,14]. The International Monetary Fund [15,16] opines that within sub-Saharan Africa (SSA) informal employment and the informal sector contribute about 20% (South Africa, Lesotho, Namibia) to 60% (Nigeria, Tanzania, Benin) to the national GDP.…”