Academic journal article The Journal of Developing Areas

An Empirical Analysis of the Informal Sector in Ghana

Academic journal article The Journal of Developing Areas

An Empirical Analysis of the Informal Sector in Ghana

Article excerpt


This paper examines the determinants of the decision of owners of small enterprises in Ghana to participate in the informal sector at start-up. For enterprises participating in the informal sector, the paper evaluates whether there are linkages with formal sector enterprises, and the determinants of the linkage. Data for the analysis is from the 2013 World Bank Enterprise survey. Using binary choice models, it is evident from the analysis that the informal sector in Ghana is dominated by people who have low levels of education, and hence, do not have otherwise employable skills. Undertaking economic activities in the informal sector becomes a means to survival, and not necessarily an attempt to evade compliance with formal sector regulations. The challenge to policy makers in Ghana is to find the right balance between policies that reduces the costs to enterprises of participating in the informal sector, whiles increasing the benefits for participating in the formal economy.

JEL Classifications: E26; O17; K42

Keywords: Informal sector, World Bank Enterprise Survey, Ghana, IV Probit

(ProQuest: ... denotes formulae omitted.)


After its introduction in the literature in the 1970s, the term 'informal sector' continues to mean different things to different people at different times. The heterogeneity in the definition of the sector is partly responsible for the different perspectives on the informal sector in the literature. This notwithstanding, the informal sector captures a large segment of the economic activities of most developing countries-activities which are outside the domain of regulated economic activities. The informal sector serves as a source of employment and income for people-a reality one cannot wish away.

The International Labour Organisation (ILO) and the World Trade Organisation WTO (2009) report that in developing countries, the informal sector accounts for, on the average, 65% of employment, and 30% of output. In addition, according to the Ghana Statistical Survey (GSS, 2008), over 80% of those employed in Ghana are working in the informal sector: about 55.9 % are self-employed; twenty percent (20%) work in family enterprises and 18% are wage employees. In the rural parts of the country, 75% of informal sector work mainly involves agriculture, fishing, fish processing, and agro- based processing. In contrast, 43% of urban workers are engaged in non-agricultural activities.

The implication is that for some countries, the informal sector is no longer at the periphery, but plays a significant role in the economic growth of countries, in terms of provision of jobs. This makes the informal sector an important part of the economy of most developing countries. However, discussions on the informal sector come with misconceptions, with relatively little work done to explore the nature, role, and character of the informal sector, particularly in developing countries.

Historically, perspectives on the linkages between formal and informal enterprises, and why the informal sector exists fall into three schools of thought: the dualist, the structuralist, and the legalist schools of thought. Sethuraman (1976) for instance, belongs to the dualist school. This school argues that informal enterprises operate as a unique sector of the overall economy with no linkages with the formal economy. On the other hand, the structuralist, exemplified by Portes, Castells and Benton (1989), see the informal sector as linked to the formal economy. Others like Moser (1984) see informal sector employment as marginalisation of the poor, and therefore argue for the need to generate employment opportunities in the formal sector to prevent the exploitation of workers in the informal sector. Chen (2006) argues that the informal sector occupies a position on the continuum of economic relationships, therefore cannot be isolated from the formal economy.

The legalists are concerned with whether or not an enterprise is formally registered and has a licence to operate. …

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