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.