The World Bank has declared a holistic approach for the Ghanaian economy to effectively formalize the informal sector, as the sector expands.
Ghana’s economy is predominantly informal in terms of employment, and effectively transitioning them into a more formalized sector requires intentionality and a strategic approach. The World Bank established that a two-step approach is needed.
“A dual policy approach is needed: supporting existing informal enterprises while simultaneously pursuing structural reforms that lead to more attractive and accessible options for formal wage employment.”
World Bank
According to the Ghana Statistical Service (GSS) report on “Productivity, Employment, and Growth, 2024,” released earlier this year, “the informal economy constitutes a considerable segment of the Ghanaian economy.” The report added that the sector is “estimated to account for about 27 percent of GDP, with an average growth of 3.4 percent annually.”
“In employment terms, the informal sector is even more important: at least eight out of every ten employed persons are engaged in the informal sector. Essentially, most activities in the informal economy are characterized by low productivity and low-pay jobs.
“Thus, 80 percent of workers contribute only about a quarter of the national output, which is an obvious constraint to the transformational agenda of the country.”
GSS Report
This data stresses the need to transform the informal sector to boost economic growth and to structure employment. With this insight, dominance of the informal sector, “business formalization is not the answer that these entrepreneurs are searching for.”
A survey made by the World Bank suggests that “only about 5% of household enterprise owners are interested in formalizing their businesses through registration,” adding that “instead, to become more successful entrepreneurs, this group seeks access to finance, acquisition of entrepreneurial skills, and tools to manage shocks.”
The Dual Policy Approach for Ghana’s Informal Sector
The first policy approach suggested by the World Bank is to improve current enterprise conditions in the short run. The literature points towards two intervention areas that have proven particularly helpful for small informal businesses, the World Bank reveals.
The first intervention is a comprehensive support program, also known as economic inclusion or graduation programs, where programs are integrated for the benefit of the informal workers. This combines social assistance with entrepreneurship training, financial literacy, coaching, and access to seed capital.
Under this, the Ghanaian informal sector should be supported by the government by a combination of interventions, such as increased credit availability, tax incentives, education, and the creation of support centers. This can “increase their income, business revenue, and assets of poor and urban entrepreneurs operating in difficult markets.”
The second intervention by the World Bank is to protect the informal sector from shock. This refers to “policies that strengthen resilience to family, business, and natural shocks.” They include shock-responsive cash transfers, health insurance, or incentivizing savings through matching grants.
The informal sector in Ghana should be cushioned against basic surprises that send shortwaves and destroy the basic capital and business establishment. The government should lend a hand to its unions to address some of these basic challenges they have.
The second leg of the dual policy that the World Bank suggested is the one Ghana is familiar with: advance structural reforms in the long run. Alongside improving conditions in the short run, a policy needs to be in place to support firm growth that yields better-paying, formal wage jobs.
There must be structural reforms, such as simplifying business registration regulations, improving labor laws, and aligning tax incentives, to help create conditions for formal job growth. As these reforms increase the availability of better wage jobs that are accessible to the urban poor, self-employed workers will begin to transition toward the formal sector, drawn by greater stability and more lucrative pay.
The government in Ghana should lay down these structural reforms to allow time to transition the small firms and businesses into a more formal entity. This is a medium to long-term instrument. That is why the two policies should be implemented together. While one gives a short-term result, the other takes time to bear fruit.
The World Bank forecast that if these are implemented effectively, the national revenue will grow exponentially, jobs will be sustained and improved, and more chain jobs will be established.
Therefore, the World Bank urges policymakers to recognize the voluntary and aspirational nature of informal entrepreneurship and to design policies that address both business and personal constraints faced by these business owners.
This can take the form of multi-faceted programs that combine social assistance with business development to help entrepreneurs achieve their growth aspirations, as well as programs and policies to help business owners manage shocks. The World Bank concluded that “by listening to what small firms want, policymakers can improve livelihoods for millions.”
