One of the more difficult challenges confronting economic development in Africa has been the achievement of structural transformation. After six decades of political independence, most countries in the region struggle with low productivity agriculture, and their limited effort to change this has been largely unsuccessful. A clearly observable feature of these economies is that as individuals attempt to move out of the low productivity agriculture, their options do not appear to be many; and this is for a good number of reasons. There are not enough non-agricultural sector jobs to absorb the large number of men and women moving away from the rural agricultural environment. In any case, many of these young people do not possess the skills and capabilities associated with modern sector employment. In the final analysis, they will end up in an undefined wide array of low income activities, some of which may be generally described as informal activity. It is noted here that a proper definition of what may be held as informal business is still a very grey area.
It is acknowledged, however, that all African economies have significant informal activity. Attitudes towards informal activity vary considerably from country to country, influenced largely by the laws of the country and how they are enforced. The result is that in several countries a good number of informal economic activities may be unsanctioned or illegal, while the same activities may be perfectly legal in others. Beyond the issue of legality, there are very few countries that have strong national or local policies that are crafted to facilitate the growth of the informal and small businesses.
It is not surprising that successful policies relating to informal activity and small businesses are difficult to find around the developing world. This comes from the fact that the driving forces behind informal activity are quite diverse and seldom very well understood. I have noted in some of my own writings that there are many researchers and policy makers who believe that informality thrives simply because formal institutions have failed to reach parts of the society. Hence, if more effort was made to formalize institutions, informality would disappear. But the literature shows a good number of countries, especially in East Asia, where modernization of economies has not led to significant disengagement with informal activity. On the other hand, informal operators have found ways to co-exist with the formal sector by providing the latter some services as efficiently as they possibly can. It could be a part of the culture that is very slow to change.
Informality is also sometimes seen as a spontaneous reaction to adverse economic conditions at a point in time. This is when informal activity is simply seen as a coping mechanism for a temporary adverse condition. There is evidence that this may indeed happen from time, largely because of the ease of entry. When public sector reforms in Ghana in the 1980s led to large scale retrenchment of workers, policymakers expected the informal sector to absorb a good number of them. It was expected that the reforms would lead to a new vibrant private formal sector that would absorb temporarily retrenched workers. This may have happened but probably not at the scale that officials expected. Even informal businesses have barriers to entry, mostly to do with the risk appetite of individuals and how their ventures will find initial capital.
There is ample indication that for many people engaged in informal businesses, the tendency is to look at the business as a permanent undertaking which may or may not grow larger with time. The issue of what makes informal businesses grow or stagnate is one of the most interesting areas in Development Economics today. Indeed informal and small business dynamics is a major and growing area of study using various experimental methods. The fact remains that not enough is known about what makes informal and small businesses grow or not grow. Researchers do not know what makes the operators diversify their businesses, largely because the reasons tend to be a mixture of both rational economic choices and a mixed bag of undefined cultural factors.
With this background to informal and small businesses in the developing world, including Ghana, I am very pleased that Nana Owusu-Afari has taken it on himself to provide some answers to critical questions being asked of the sector. His objective is to encourage policy makers to pay more attention to informal and small businesses. He pursues this objective by providing very useful insights into how informal businesses operate in Ghana. He pays attention to their employment characteristics in order to show that they offer employment to far more Ghanaians than the formal sector does. The credit constraint facing them is also properly documented. The author takes on the huge task of showing the contribution that informal businesses make to the economy before discussing the challenges they face more fully, including job security for employees, infrastructure challenges, and the high cost of inputs. The author then looks at what governments are doing in other countries to support informal and small businesses. The countries of interest here are Kenya, Zimbabwe and India. Finally, in the last chapter of the book, Nana Owusu-Afari dwells on how Ghana can grow informal businesses. The proposals for supporting informal and small business are varied and very relevant. They cover such diverse themes as the institutional and legal framework, easy access to funds and providing strong voice through trade unions.
This is a book that I recommend to both students and policy makers. It sheds light on a number of difficult topics and helps to understand the context and environment within which informal businesses operate. It provides good data on the operations of informal businesses in Ghana and thus helps to plug some of the several holes in our understanding of these important, but largely neglected, businesses.
I would like to end by congratulating Nana Owusu-Afari for taking time off his very busy schedule as a solid entrepreneur to conduct research and write a good book. His great experience as an accomplished businessman is reflected in the nuanced argumentation on what to do about informal and small businesses. It has been a worthy endeavor.
Prof. Ernest Aryeetey, Renowned Economist and Former Vice- Chancellor, University of Ghana.