WTP- 138 VV)RLD BANK TECH NICAL PAPER NUMBER 133 ifND)USTRY AND FINANCE SERIES Small Enterprises under Adjustment in Ghana William F. Steel and Leila M. Webster FILE COPY iEED _ )M=S ANN TN NURING-NSTI EVE__O N LAND TENR-MNIT RECENT WORLD BANK TECHNICAL PAPERS No. 74 Hoban, Evaluating Traffic Capacity and Improvements to Road Geometry No. 75 Noetstaller, Small-Scale Mining: A Review of the Issues No. 76 Noetstaller, Industrial Minerals: A Technical Review (also in French, 76F) No. 77 Gunnerson, Wastewater Management for Coastal Cities: The Ocean Disposal Option No. 78 Heyneman and Fagerlind, University Examinations and Standardized Testing: Principles, Experience, and Policy Options No. 79 Murphy and Marchant, Monitoring and Evaluation itn Extension Agencies (also in French, 79F) No. 80 Cemea, Involuntary Resettlemnent in Development Projects: Policy Guidelines in World Bank-Financed Projects (also in Spanish, 80S, and French, 80F) No. 81 Barrett, Urban Transport in West Africa No. 82 Vogel, Cost Recovery in the Health Care Sector: Selected Country Studies in West Africa No. 83 Ewing and Chalk, The Forest Industries Sector: An Operational Strategy for Developing Countries No. 84 Vergara and Brown, The New Face of the World Petrochemical Sector: Implications for Developing Countries No. 85 Ernst & Whinney, Proposals for Monitoring the Performance of Electric Utilities No. 86 Munasinghe, Integrated National Energy Planning and' Management: Methodology and Application to Sri Lanka No. 87 Baxter, Slade, and Howell, Aid and Agricultural Extension: Evidence from the World Bank and Other Donors No. 88 Vuylsteke, Techniques of Privatization of State-Owned iEnterprises, vol. I: Methods and Implementation No. 89 Nankani, Techniques of Privatization of State-Owned Enterprises, vol. II: Selected Country Case Studies No. 90 Candoy-Sekse, Techniques of Privatization of State-Owned Enterprises, vol. HI: Inventory of Country Experience and Reference Materials No. 91 Reij, Mulder, and Begemann, Water Harvestingfor Plant Production: A Comprehensive Review of the Literature No. 92 The Petroleum Finance Company, Ltd., World Petroleum Markets: A Frameworkfor Reliable Projection No. 93 Batstone, Smith, and Wilson, The Safe Disposal of Hazardous Wastes: The Special Needs and Problems of Developing Countries No. 94 Le Moigne, Barghouti, and Plusquellec, Technological and Institutional Innovation in Irrigation No. 95 Swanson and Wolde-Semait, Africa's Public Enterprise Sector and Evidence of Reforms No. 96 Razavi, The New Era of Petroleum Trading: Spot Oil, Spot-Related Contracts, and Futures Markets No. 97 Asia Technical Department and Europe, Middle East, and North Africa Technical Department, Improving the Supply of Fertilizers to Developing Countries: A Summary of the World Bank's Experience No. 98 Moreno and Fallen Bailey, Alternative Transport Fuels from Natural Gas No. 99 International Comnmission on Irrigation and Drainage, Planning the Management, Operation, and Maintenance of Irrigation and Drainage Systems: A Guide for the Preparation of Strategies and Manuals (also in French, 99F) No. 100 Veldkamp, Recommended Practices for Testing Water-Pumping Windmills No. 101 van Meel and Smulders, Wind Pumping: A Handbook No. 102 Berg and Brems, A Casefor Promoting Breastfeeding in Projects to Limit Fertility No. 103 Banerjee, Shrubs in Tropical Forest Ecosystems: Examples from India No. 104 Schware, The World Software Industry and Software Engineering: Opportunities and Constraints for Newly Industrialized Economies (List continues on the inside back cover) Industry and Finance Series This series is produced by the Industry Development Division and the Finandal Development Division of the 'World Bank to disseminate ongoing work and stimulate further discussion. The series includes studis of individual sectors in industry, aspects of world industry, industrial strategy and policy, small enterprise development, and financal development. Already published are the following *VoL 1 Leechor, and Hur, Structural Changes in World Industry: A Quantitative Analysis of Recent Developments [TIP No. 5,1983] *Vol. 2 Fog and Nadkarni, Energy Efficiency and Fuel Substitution in the Cement Industry with Emphasis on Developing Countries TIP No. 17,19831 *Vol. 3 Roe, Industrial Restructuring. Issues and Experinces in Selcted Developed Economics I'P No. 21,19841 *Vol. 4 Meunier and Kops, Energy Effincy in the Steel Industry with Emphasis on Developing Countries [TP No. 22, 1984] *Vol. 5 Sheldrick, World Sulphur Survey TIP No. 24,19841 *Vol. 6 Steel and Evans, Industritlization in Sub-Saharan Afrca Strategies and Peformance TIP No. 25,1984; also in French] *Vol. 7 Page and Steel, Small Enterprise Development: Economic Issues from African Experience TIP No. 26, 1984; also in French] *Vol. 8 Wijetilleke and Ody, World Refinery Industry: Need for Restructuring T No. 32,1985] *VoL 9 Duvigneau and Prasad, Guidelines for Cakulating Fnancil and Economic Rates of Return for DFC Projects [TP No. 33,1984; also in French and Spanish] VoL 10 Rhee, A Framework for Export Policy and Administration: Lssons from the East Asian Experience (1984; also in Spanish) Vol. 11 Segura, Shetty, and Nishimizu, Fertilizer Producer Pricing in Developing Countries: Issues and Approaches (1986) Vol.12 Franz, Stenber, and Strongman, Iron Ore: Global Prospects for the Industry, 1985-95 (1986) VoL 13 Leechor, Tax Policy and Tax Refomr in Semi-Industrial Countries (1986) VoL 14 Hanson and Neal, Interest Rate Policies in Selected Developing Countries, 1970-82 (1986) Vol. 15 Vogel and Burkett, Mobilizing Small-Scale Savings: Approaches, Costs, and Benefits (1986) Vol. 16 Levitsky, World Bank Lending to Small Enterprises: A Review (1986) VoL 17 Ayub and Hegstad, Public Industrial Enterprises: Determinants of Perfonnance (1986) Vol. 18 Hanson and Rocha, High Interest Rates, Spreads, and the Costs of Intermnediation: Two Studies (1986) *Vol. 19 Levitsky and Prasad, Credit Guarantee Schemes for Small and Medium Enterprises [TI' No. 58,1989] *Vol. 20 Sheldrick, World Nitrogen Survey [Il? No. 59,19871 *Vol. 21 Mould, Financial Inforrmation for Management of a Development Finance Institution: Some Guidelines [TP No. 63,19891 *Vol. 22 Steel and Webster, Small Enterprises Under Adjustment in Ghana [TI No. 138,1991] Published as a World Bank Technical Paper [TP number given in brackets] Studies of Related Interest The following studies are related to the topics covered in the Industry and Finance Series, ie. industrial subsectors, industrial strategy and policy, small enterprise development, and financal development. Books Cortes, Berry, and Ishaq, Success m Small and Medium-Scale Enterpres: the Evidencefrtom Coombia (1967) Little, Mazumdar, and Page, Small Manufacturing Enterprses: A Compartie Study ofIndia and Other Economnies (1987) Meier and Steel, eds., Industrial Adjustment in Sub-Saharan Afyca (1989) Pack, Productivity, Technology, and Industrial Development: A Case Study in Tetiles (1987) Policy and Research Reports No. 7 Frischtak, Hadjmwhael, and Zachau, Compettion Policies for Industrializing Countres (1989) No. 9 Lieberman, Industrial Restructuring: Policy and Practice (1990) Discussion Paper Series No. 27 Bhattacharya and Linn, Trade and Industrial Policies in the Deoelopmg Countries of East Asia (1988) No. 50 Cho and ichatkhate, Lessons of Financial Libealization in AsiaL A Comparative Study (1989) No. 113 Webster, World Bank Lendingfor Smal and Medium Enterprises: Fifteen Years of Experie (1991) No. 117 Holt and Ribe, Developing Financial Institutions for the Poor and Reducing Barriers to Access for Women (1991) Technical Paper Series No. 104 Schware, World Software Industry and Software Engineering: Opportunities and Constraints for Newly Industrialized Econonies (1989) No. 122 Dessin& Support for Microenterprises: Lessons for Sub-Saharan Afiica (1990) Staff Working Papers No. 764 Corbo and de Melo, Scranblingfor Survial: How Firms Adjusted to Recent Reforms in Argentna, Chile, and Uruguay (1985) Industry and Energy Deparbnent Working Papers, Industry Series No.17 Morrow, Flowers: Global Subsector Study (1989) No.18 Sananikone, The Shrinp Industry: Global Subsector Study (1989) No. 19 Bowing Garments: Global Subsector Study (1989) No.34 Hadjimichael, Footwear: Global Subsector Study (1990) No. 38 Rhee, Young, and Galvez, Export Finance in the Philippines: Opportunities and Constraints for Developing Country Suppliers (1990) No.41 Frischtak, Adjustment and Constrained Response: Malawiat the Threshold of Sustained Growth (1990) Policy, Research, and External Affais Working Papers WPS 52 Bhatt, Financial Innowtion and Credit Market Development (1989) WPS 53 Ibanez, Venture Capital and Entrepreneurial Development (1989) WPS 55 Balassa, Financial Liberalization in Developing Countries (1989) WPS 57 Antoniades and Kouzionis, Financial Distress of Industrial Firms on the Greek Banking System (1989) WPS 134 Sagan, International Trade in Financial Services (1989) WPS 164 Honohan and Atiyas, Intersectoral Financial Flows in Developing Countries (1989) WPS 169 Gelb and Honohan, Financial Sector Rforms in Adjustment Programs (1989) WPS 266 Dailami, Policy Changes that Encourage Private Business Investment in Colombia (1989) WPS 381 Gelb and Sagari, Trade in Banking Services: Issues; for Multilateral Negotiations (1990) WPS 389 Honohan, Monetary Cooperation in the CFA Zone (1990) WPS 390 Honohan, Pnce and Monetary Convergence in Cu;7ency Unions: The Franc and Rand Zones (1990) WPS 421 ChaO ley and Honohan, Taxation of Financial Intermediation: Measurement Principles and Appication to Five African Countries (1990) WPS 515 Dailami and Atkin, Stock Markets in Developing Countries: Key Issues anda Research Agenda (1990) WPS 517 de Melo and Tarr, Do Wage Distortions Justify Protection in the U.S. Auto and Steel Industries? (1990) WPS 528 Caprio and Honohan, Monetary Policy Instruments for Developing Countries (1990) WPS 540 Sagai and Guidotti, Venture Capital Operatfons and their Potential Role in LDC Markets (1990) WPS588 Levy, Obstacles to Developing Small and Medium-Sizsd Enterprises: An Empircal Assessment (1991) WPS 595 Blejer and Sagari, Hungary: Financial Sector Reform in a Socialist Economy (1991) WORLD BANK TECHNICAL PAPER NUMBER 138 INDUSTRY AND FINANCE SERIES Small Enterprises under Adjustment in Ghana William F. Steel and Leila M. Webster The World Bank Washington, D.C. Copyright e 1991 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 1991 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its natioall affiliation. The material in this publication is copyrighted. Requests for penrission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for dassroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 IParis, France. ISSN: 0253-7494 William F. Steel is principal industrial economist, and Leila M. Webster a small industry specialist, both in the Industry Development Division, Industry and Energy Department of the World Bank. Library of Congress Cataloging-in-Publication Data Steel, William F. Small enterprises under adjustment in Ghana / William F. Steel and Leila M. Webster. p. cm. - (World Bank technical paper, ISSN 0253-7494; no. 138. Industry and finance series) Includes bibliographical references. ISBN 0-8213-1822-5 1. Industry and state-Ghana. 2. Ghana-Economic policy. 3. Small business-Ghana. I. Webster, Leila, 1950- . II. Title. m. Series: World Bank technical paper; 138. IV. Series: World Bank technical paper. Industry and finance series (Unnumbered) HD3616.G533S74 1991 338.9667-dc2O 91-17225 CIP ACKNOWLEDGMENTS The authors are grateful to the Industry and Energy Division of the Western Africa Department and to Dr. E.K Abaka, Director of the National Board for Small-Scale Industries (NBSSI), for supporting this study. The authors were assisted in the field work by John Wayem, Frederick Gyebi Acquaye (NBSSI), Ramatu Abdel-Karim, Paul-Doe Abotsi, Robertson Adjei, Allen Senyo Ahlijah, and Yaw Sah-Somuah. The data were entered and processed by Elizabeth Ntum (NBSSI), Alvaro Benitez de Lugo, and Kumari Jayatilleke. Word processing was done by Wilson Peiris and Anna Marafion. The authors acknowledge useful comments from Kwamena Adjaye, Surendra Agarwal Benson Ateng, Nancy Barry, Don Mead, and participants in a World Bank seminar without implicating them in any errors that remain. GLOSSARY C = cedis ERP = Economic Recovery Proramme ILO International Labour Organization MIST = Ministry of Industries, Science and Technology NBSSI = National Board for Sma]l-Scale Industries OECD = Organization for Economic Cooperation and Development SSEs = small-scale enterprises TCCs = tax clearance certificates USS = United States dollars UNIDO = United Nations Industrial Development Organization USAID = United States Agency for International Development WEP World Employment Prolgramme (ILO) TABLE OF CONTENTS EXECUTIME SUMMARY ........... .. ........ ...... ix L INTRODUCTION .... .. .... 1 The Role of Small Enterprises in Industrial Development. 1 The Adjustment Context. 3 Evolution of Large- and Small-Scale Industry in Ghana. 4 The Economic Recovery Programme and its Impact. 7 The Survey Rationale and Methodology. 8 II. CHARACTERISTICS AND PROBLEMS OF SAMPLE FIRMS .10 The Owners .11 The Firms.15 Problems .17 m. INDUSTRIAL ADJUSTMENT BY SIZE CATEGORY AND SUBSECTOR 22 Changes in Nsawam's Small-Scale Sector Since 1973 .22 Patterns of Employment Change: 1989 Survey .24 Impact of Adjustment on Production and Employment. 25 Investment Response .29 Adaptive Behavior .29 Sources of Competition .32 Constraints on Adjustment .32 Constraints on Future Growth .33 IV. ENTREPRENEURS' VIEWS OF REGULATORY ENVIRONMENT ISSUES 37 The Current Regulatory Environment .37 Problems for Investment .39 BIBLIOGRAPHY ..................................................... 43 OTIIER REFERENCES ................................................ 45 ANNEXES ANNEX A. SUMMARY OF CASE STUDY OF SMALL INDUSTRY IN GHANA. 47 ANNEX B: CHARACTERISTICS AND PATITERNS OF EMPLOYMENT CHANGE IN 1989 SURVEY BY FIRM SIZE AND PERIOD OF ESTABLISHMENT ........... ........................... so ANNEX C: EMPLOYMENT IN SMALL AND LARGE MANUFACrURING FIRMS, 1963-84 ............. ........................... 51 ANNEX D: INTERVIEWING GUIDE FOR SMEs AND INFORMAL SECTOR ... 53 - vii - TABLES Table 1: Growth in Manufacturing Output and GDP, 1965-87 .... ....... 4 Table 2: Distribution of Manufacturing Employment and Output by Size Category. 6 Table 3: Large Scale Manufacturing Production and Capacity Utilization, 1977-88. 8 Table 4 Distribution of Firms and Employment by Manufacturing Subsector ............................. 11 Table 5: Changes in Production Since 1983 ........................ 13 Table 6: Distribution and Age of Firms Surveyed by Size and Gender of Owner .14 Table 7: Import content of Raw Materials by Subsector and Firm Size ........................................... 16 Table 8: Major Problems in Current Operations by Firm Size .... ....... 18 Table 9: Major Problems in Current Operations by Subsector .... ....... 20 Table 10 Distribution of Problems by Size and Subsector, Accra/Nsawam/Aburi, 1973 .............................. 21 Table 11: Growth, Distribution and Size of SSEs in Nsawam, 1973-89 ......... .......................... 23 Table 12: Employment Growth by Firm Size, 1975-83 and 1983489 .... ..... 25 Table 13: Impact of Adjustment on Production and Employment by Firm Size ............. ........................... 27 Table 14: Impact of Adjustment by Subsector ........................ 28 Table 15: Changes Under Adjustment for Firms Established by 1983, by Size ........... .......................... 30 Table 16: Adjustment Responses and Constraints by Firm Size .... ....... 33 Table 17: Major Constraints on Future Expansion by Firm Size .... ....... 34 Table 18: Major Constraints on Future Expansion by Subsector .... ....... 36 Table 19: Regulatory Problems for Current Operation by Firm Size .... .... 38 Table 20: Problems of Business Environmrent for New Investment, by Firm Size ............. ........................... 41 FIGURES Figure 1: Changes in the Size Structure of Industry over Time .... ........ 2 Figure 2: Share of Firms with Falling or Rising Production by Size and when Established ............................ 27 Figure 3: Share of Firms with Change in Import Content by Size and Subsector ........ ......................... 31 - viii - EXECUTIVE SUMMARY In some African countries the weak supply response of industrial investment under structural adjustment programs highlights the issue of moving from stabilization to dynamic growth. Governments that have undertaken trade and industrial policy reforms expecting to create a more competitive industrial structure are disturbed when production stagnates without visible signs of new investment to take the place of previously overprotected firns. Aggregate trends, however, may conceal dynamic structural changes at the subsector and firm level. To understand the determinants of supply response requires a microeconomic approach--an analysis of how entrepreneurs are reacting and what constraints they face. Ghana often is cited as an African country that has undertaken major macroeconomic reforms with generally positive results for economic growth. Industrial production in Ghana has recovered rapidly from the drastically constrained level of 1983, but the index of production in 1988 remains well below the peak of 1977. Within the industrial sector, the effects of structural adjustment policies have differed among subsectors and firms: the new environment has brought both new opportunities and intense competition. Monitoring of adjustment has focused on the larger, often state-owned enterprises, many of them adversely affected by the more competitive environment. Little is known, however, about the impact of adjustment on smaller firms, which were excluded from the previous direct allocation of resources and which are thought to be more flexible in adapting to changed circumstances. A survey of small-scale enterprises (SSEs) in Ghana was carried out in November 1989 to learn more about the impact of the adjustment program on their operations, to evaluate their potential contribution to dynamic industrial recovery, and to identify appropriate measures that would accelerate the growth of small enterprises in numbers, size and productivity. Specific objectives of the survey were to: * learn more about the characteristics of small firms and their owners; * analyze how policy changes have affected small firms, highlighting entrepreneurs' strategies for adapting to their new environments and comparing firm responses across sizes and subsectors; and * identify constraints to the future growth of small firms. Survey results show that adjustment policies generally have forced Ghana's small-scale induistries to become more competitive to survive and that significant structural changes are taking place across subsectors and within firms. Without doubt, the adjustment process has strained most firms' operations. Profits have been squeezed between rising input costs and restrained demand, and growth has been s]lowed by the difficulty of financing working capital and new investment. Nevertheless, there is evidence of considerable entrepreneurial initiative in changing product mix and seeking market niches that have opened up under the new exchange rate regime. Some SSEs have adapted to changing demand by producing specialty products, custom-made items, or low-cost substitutes for imported goods. Interest in exports is high, although success has been primarily in the recovery of previously exported products such as furniture. Responses to adjustment policies appear to have been less on the input than on the output side. At least for SSEs, relative prices of imported versus domestic inputs may not have changed as much as might have been expected, given the extensive depreciation of the cedi--partly because SSEs already were paying black market prices and partly because devaluation tends to raise prices of all tradable goods. SSEs find the high price of local materials as much a problem (especially in the garments subsector) as the higher cost of imported inputs. Many smaller firms have raised their share of imported inputs as liberali2ation increased their access to imports. Some larger firms, which previously received inputs through irnport licenses at the overvalued exchange rate, have shifted toward domestic inputs in response to higher irnport - ix - prices. These variations are concealed by the aggregate data, which show no appreciable change in overall import content for industry. The entrepreneurs in the sample fell into two broad groups: (i) dynamic, successful adapters with good prospects for the future (found mostly among small- and medium-scale enterprises); and (ii) stagnant producers who have not mastered the new environment and who seem unable to change products in the face of mounting competition (found mostly among microenterprises). Successful firms with good prospects are found in many types of products, and it is unwise to make predictions about likely growth purely on a subsectoral basis. The key ingredients are entrepreneurial drive and ability, which were observed in many forms. Entrepreneurs who established SSEs after the Economic Recovery Program of 1983 tend to be better educated, more responsive to demand, and more able to seize opportunities than owners of older businesses. These new entrepreneurs offer substantial hope for the emergence of a strong entrepreneurial class under policies that reduce the political and economic uncertainties associated with long-term fixed investment. Growth of the private industrial sector in the medium term will depend in large part on whether ithese dynamic entrepreneurs are encouraged by an improving macroeconomic environment and increasing access to finance for expansion. A strong technical education system would contribute importantly to the long-run supply of capable, adaptive entrepreneurs. For potentially dynamic small firms, an important constraint is their lack of access to finance for working capital and new investment. Some are ready to grow beyond the limits of self-finance, but they remain unable to obtain the necessary funds from fonrnal financial institutions. One policy implication is that supply-side assistance programs will have only limited impact until the financial system is restructured to function more efficiently, credit is eased, and new instruments are developed to meet the needs of SSEs. A second constraint is the lack of information and business services, particularly for those firms with strong export potential. SSEs have little direct knowledge of foreign markets and current technologies. Thus, marketing and technology assistance might prove useful to some SSEs, although most expressed little interest in such programs. At the other end of the scale are the many microentrepreneurs in traditional activities such as sewing and carpentry. Because of public sector employment cutbacks under the adjustment program, an increasing number of workers have no alternative to self-employment. At the same time, weak purchasing power among the lower-income population constrains the prospects for individual microenterprises. Although some microentrepreneurs will succeed and grow, most are likely to continue hand-to-mouth as increases in demand are quickly competed away. On the positive side, micro and smaDl enterprises perform an important training function through the apprenticeship system. However, this supply-driven mechanism needs complementary growth in demand and training in new product lines if apprentices hope to raise their standard of living. Expenditures to increase the number of microenterprises will have little net benefit without corresponding increases in the incomes of their customers. Regulatory reform will have little impact on microenterprises, the majority of whom operate within the law but have not reached the size where regulations become burdensome. The overall business environment has generally improved during the adjustment program, although many shortcomings remain. The government is widely seen as favoring greater private investment, but many entrepreneurs remain wary of arbitrary government interference, such as shutting some firms down or forcing small enterprises to relocate. Improving the tax collection system by lowering rates and reducing the restrictiveness of Tax Clearance Certificates would facilitate operation of medium- and large-scale firms. Uncertainty about political and economic stability and lack of finance appear to be the most immediate restraints on investment. Measures to expand demani at the lower end of the income scale are needed to enable microenterprises to contribute to productivity growth as well as to labor absorption. - x - I. INTRODUCIION Slow recovery of industrial production and investment under structural adjustment policies is a growing source of concern, especially in Africa. Many countries have reformed their macroeconomic policies to correct critical distortions that contributed to economic stagnation in the late 1970s and early 1980s. Complementary trade and industrial policy reforms have been aimed at making previously overprotected industrial sectors more efficient and dynamic. Governments frequently look to industry to lead economic recovery, but they are disturbed when they see some large firms stagnating without visible signs of new investment to take their place. This study investigates the hypothesis that small enterprises play an important dynamic role in the adjustment process and in Africa's industrial development. Small enterprises are sensitive to changes in demand because many of them sell directly to customers. A low level of technology gives them the flexibility to change product lines and inputs. Thus they may be in a favorable position relative to larger enterprises to respond to liberalization of markets and changes in relative prices. A shift in relative prices that favors production of tradable goods may induce small entrepreneurs to shift from commercial and rent- seeking activities into industry and other directly productive activities with greater potential for rising productivity. If indeed small enterprises can take advantage of opportunities created by adjustment policies, they can better fulfill their dynamic role--which many observers see as missing in Africa--in the transition from an industrial structure based on household manufacturing to one based on economies of scale in larger industries. Ghana's Economic Recovery Programme (ERP) has had generally positive effects in reviving the economy since it was initiated in 1983. After a decade of decline, industrial production initially recovered rapidly, especially as access to imported inputs increased. But import liberalization also increased competition for some producers, leading to renewed calls for protection and an impression that the ERP is adversely affecting industry. To understand the dynamics of response to adjustment policies, a microeconomic approach is needed--especially to assess the impact on small firms that are not included in recorded statistics. This study addresses several questions that arise when industrial supply response falls short of expectations: * Is responsiveness constrained by factors other than the incentive environment? * What kinds of structural changes occur within industry that are not captured by looking at aggregate growth rates? * Do the negative effects of policy reforms fail mainly on larger, more visible firms? Do smaller firms tend to benefit? * Where does dynamic potential lie, and what policies and institutional reforms can help promote growth of output and investment? The Role of Small Enterprises in Industrial Development Both cross-sectional and time-series data suggest that the industrialization process normally begins with rapid growth of small-scale enterprises (SSEs), some of which expand into medium- and large- scale firms or survive in a market niche where they can remain competitive as large-scale industries come to dominate the size distribution (Anderson, 1982; Cortes et al., 1987; Liedholm and Mead, 1987; Little, et al, 1987; Nanjundan, 1987; Staley and Morse, 1965). Figure 1 illustrates this process, which is especially typical of Asian countries that have successfully industrialized. Although small firms provide the bulk of manufacturing employment in most African countries and contribute from 26 to 64 percent of manufacturing value added (3 to 8 percent of GDP; Liedholm and Mead, 1987), they are dominated by microenterprises of fewer than 10 workers. Thus, some observers argue that there is a "missing middle in the size distribution of industry in African countries which must be filled for industrial development to proceed (Kilby, 1988). Figure 1: Changes in the Size Structure of Industry over Time iMost African d countrZ * Xndlao omsb Turkey Korea, Euroe, .~~~~~~~lia Japa N.Awj Pdhotd I P P an wSmatiswon lsI o octnvdtofles LI Tlime I I . Iobo I Phas I IPhas I I Phase II lttlzt2 on) I I eSmall worksbops and foctoti s | | _, + ~~~~~~~~~~Timef M I induItraUzotlon) Lacoree l -* t I 1 It I I ~~~~~~~Time _____________ I -..--....I b (or leve of Industrlciatzotln) Source: Anderson (1982), p. 981. In the post-independence period, many African countries attempted to leap directly to a modern industrial structure through public investment in large-scale industries. A leading role for the state was seen as necessary in the absence of a strong indigenous entrepreneurial class which could industrialize without depending on foreign investors. But inadequate attention to economic viability and market prospects resulted in substantial excess capacity that is poorly integrated with the domestic economy and cannot survive without excessive protection or subsidies. Many of these enterprises have been squeezed by adjustment policies that reduce protection, cut back subsidies, restrain demand, and change relative prices. In this context, several arguments can be advanced that expansion of small-scale enterprises (SSEs) is a desirable strategy for industrial recovery in the medium term, if not a necessary condition for sustained industrialization in Africa: -2 - * Successful industrialization must have an indigenous base, and expansion of the SSE. sector would help develop the experienced entrepreneurial and managerial class that is needed as a basis for more efficient indigenous investment in and management of large-scale industries (Bolton, 1971; Bruton, 1990, Kilby, 1988). * Since SSEs tend to be relatively labor-intensive and to utilize low levels of technology, a strategy conducive to expansion of the SSE sector is consistent with employment and income distribution objectives while allowing for sustained productivity increases through improvements in technology (Staley and Morse, 1965; Steel and Takagi, 1983). * Small private industries have been repressed in the past through restrictive licensing, tax incentives for large firms, direct allocation of credit, materials and foreign exchange to large firms (especially in the public sector), and hostility of some governments toward private profits; liberalization of these restraints and attitudes is likely to unleash investment in highly profitable opportunities in SSEs that were not taken up in the past (Little, et al, 1987; UNIDO, 1989). * Even when conditions permit large-scale industries to dominate, a substantial share cf SSEs will be efficient because (i) they serve dispersed local markets, (ii) they lprovide differentiated products with low scale economies for niche markets, or (iii) they specialize narrowly as subcontractors for larger firms (Anderson, 1982; Anheier and Seibel, 1987). This study addresses the empirical issue of the extent to which structural adjustment policies favor developments of SSEs. As discussed in the next section, the conflicting effects of stabilization and liberalization provide no clear a priori indication of how SSEs will fare. Furthermore, potential responses to the removal of external constraints may be inhibited by internal constraints (Schmitz, 1982). The Adjustment Context Although the rate of GDP growth in countries with intensive adjustment programs is higher than in non-adjusting countries (taking into account the effects of initial conditions, external shocks and external financing), the tendency of investment to fall in adjusting countries gives some cause for concern: fto sustain adjustment and restore growth, countries must not only reduce distortions, they must also create the conditions for the eventual increase in investment" (World Bank, 1990a, p.5). Adjustment policies affect industries differentially, with varying incentives for investment in new capacity. Expenditure reduction policies tend to reduce demand for industrial products generally. Expenditure switching policies--such as devaluation--that raise the relative price of tradables tend to favor industrial value added in exporting and import-competing activities, but they also raise costs for industries that depend on tradable iinputs. Liberalization of markets, especially for imports, benefits activities that previously lacked access to allocated inputs, but also increases competition for many import-substitution industries. The net result for incentives depends on the mix of policies, how well they are implemented and transmitted through price signals, and the characteristics (including size distribution) of individual industries. For investors to respond to improved incentives, they must be able to obtain resources at reasonable cost and to pursue profits without undue risk. Resources include financial, infrastructural and business services, as well as physical inputs. Business risks are affected by the degree of economic and political stability and by official attitudes toward private profit. The cost of doing business is also determined by taxation and the regulatory environment. The influence of these underlying conditions on investment behavior may vary considerably by firm size and the resulting extent of access to--or intervention by--official institutions. Prospects for investment in large-scale industries may not be very favorable over the medium term. Many countries have initiated adjustment programs only after severe deterioration in infrastructural services, financial systems, and other institutions. Although some large-scale industries raise their capacity utilization - 3 - as adjustment borrowing makes additional resources available, most are reluctant to invest in new capacity until underlying infrastructural, financial and institutional conditions are improved (Meier and Steel 1989, chapter 6). Unless these problems are resolved, labor productivity is raised, technological and marketing services are available, and the regulatory environment is eased, African countries will find it difficult to attract large-scale investors in industries that must compete on international markets. Small enterprises, however, can more readily operate with low levels of infrastructural and other nontraded inputs, while providing fertile ground for their development Furthermore, small indigenous entrepreneurs are less likely to have investment possibilities outside the country. Thus, SSEs may have a particularly important role to play in sustaining a positive investment response to adjustment policies over the medium term--if such investments are made sufficiently attractive, financial and physical resources are available to potential investors, and the administrative system does not impede them. Understanding how small enterprises fare in the adjustment process is also relevant to the increasing concern for the social aspects of adjustment. Informal alctivities absorbed an increasing share of the labor force during the 1980s as formal employment opportunities diminished, first under economic crises and then under public expenditure cutbacks (World Bank, 1990b). Adjustment programs increasingly include measures to help laid-off workers go into business for themselves, for example in Ghana, Madagascar, and Mauritania (World Bank, 1990a). It is not clear, however, whether demand for the goods and services provided by microenterprises and SSEs can keep pace with the growing supply of labor in these activities; if not, incomes and productivity are likely to fall in those activities characterized by easy entry and elastic demand (World Bank, 1990b). A consensus is emerging that the fundamental issue is how to create a policy and business environment that enables small enterprises to contribute productively to industrial development, not whether they have a role to play (Liedholm, 1990; Schmitz, 1982). Furthermore, these conditions cannot be specified in general terms for all developing countries; they depend on local capabilities and economic circumstances. This study represents an attempt to develop a methodology for analyzing what conditions most constrain small enterprises in the context of a particular country, Ghana, that is undertaking a program of structural and industrial adjustment. Evolution of Large- and Small-Scale Industry in Ghana Industry remains a relatively small share of Ghana's economy at about a tenth of GDP; agriculture accounts for over half. Nevertheless, industrial production has tended to lead growth--and decline--in Ghana's economy since independence in 1957 (Table 1). It was a central focus of President Kwame Nkrumah's drive to modernize the economy in the 1960s through a combination of state-owned industries and major foreign investments or joint ventures. Nkrumah's approach minimized the role of the indigenous private sector in industrialization both because it seemed inadequate to the task and because he wished to avoid building up a class that might oppose him. Table 1: Growth in Manufacturing Output and GDP, 1965-87 (percent per annum) Source of GDP 1965-73 1973-80 1980-87 All sectors 3.4 -0.3 1.4 Manufacturing 6.5 -2.8 1.3 Agriculture 4.5 0.0 0.0 Source: World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth, Washington, D.C., 1989, Statistical Appendix, Table 2. -4 - Small enterprise was already a widespread source of income in Ghana. A sample survey in 1963 estimated that small-scale manufacturing employed some 184,000 workers in Ghana, or about 17 percent of total nonagricultural employment, as against nearly 32,000 or 3 percent in large-scale manufacturing (Table 2; an additional 61,000 persons were not covered in either survey, presumably because they worked in their homes). By 1973, employment in large-scale firms had doubled to 64,000 while that in small-scale and household enterprises rose only by half to a combined total of about 364,000.Y Although small-scale firms contributed only about a quarter of Ghana's manufacturing value added, they accounted for al least 85 percent of manufacturing employment--most of it outside the principal urban centers. Over time, Ghanaian entrepreneurs have moved into the large industrial enterprises that were once the virtually exclusive domain of foreign firms and the state. According to the Industrial Statistics, the number of large-scale firms owned by Ghanaian citizens increased fourfold from 1962 to 1982 (rising from 13 percent to 17 percent of gross manufacturing output) and the number of joint private Ghanaian-foreign firms increased tenfold.Y By the early 1980s over 70 percent of large-scale industrial capacity was idle, largely due to lack of foreign exchange for needed inputs. As real incomes fell and employment opportunities in large firms and the public sector diminished in the late 1970s, many people initiated part-time businesses or became self- employed. The consequences for value-added in smaU manufacturing are unclear. Trading rather than manufacturing activities were favored by the large distortions between official and black market prices and by the uncertain investment climate. Nevertheless, some smali producers were effectively shielded from import competition by the economic crisis--for example, metal workers, vehicle repair shops and low-cost furniture makers. The more technically astute entrepreneurs succeeded through innovative use of local raw and waste materials to produce import substitutes, for example in making soap. On the other hand, many SSEs--such as printers, cosmetics producers, and even weavers of traditional kente cloth--could not reduce their reliance on imported inputs, and they remained severely constrained. The problems and characteristics of Ghana's small enterprises have been surveyed in a number of studies (see Bibliography on Small Enterprises in Ghana).y Inadequate finance is consistently cited as a primary problem, especially with respect to starting or expanding the business. Most entrepreneurs surveyed sought funds from multiple sources to supplement their own, but loans from banks provide no more than 3 percent of SSE investment and those from informal lenders another 2 percent. Personal savings provide about 60-70 percent of initial investment capital, with gifts and loans from relatives and friends bringing the share of private savings to an average of 91-95 percent. Successful growth of SSEs depends on gradually reinvesting profits from the business. The dominant constraints on firms' ability to use their capacity once established are restricted alccess to raw materials and inadequate working capital. Low working capital makes it difficult for most SSEs to maintain stock and generate enough profits to expand operations. Firms that have been in business for some time see obtaining materials and machinery as more of a problem than at start-up. Y Data from a survey done in 1989 are not yet available. j nThe first increase may have included residents of nonindigenous origins who became Ghanaian citizens. The second increase was in part attributable to the requirement that foreign firms have local partners. The ensuing discussion is based primarily on survey results reported in Anheier and Seibel, 1987; Aryee, 1981a and 1981b; Hakam, 1978; Riedel, et al, 1988; Sethuraman, 1977; Steel, 1977; and Thomi and Yankson, 1985. 5- Table 2: DISTRIBUTION OF MANUFACTURING EMPLOYMENT AND OUTPUT BY SIZE CAIEGORY Small-Scale Household Organized Large- Year Total or Rural or Rural Scale a/ Total b/ Employment (number of workers) 1963 245,187 61,160 J 184,027 31,865 277,052 1970 358,958 n.a. n.a. 55,899 414,857 1973 363,524 309,078 e/ 54,446 e/ 64,000 427,524 1984 532,585 448,651 y 83,934 gl 55,783 588,368 Distribution of employment (%) 1963 88.5 22.1 66.4 11.5 100.0 1970 86.5 n.a. n.a. 13.5 100.0 1973 85.0 72.3 12.7 15.0 100.0 1984 90.5 763 14.3 9.5 100.0 Share of manufacturing in total non-agricultural employment (%) 1963 22.8 5.7 17.1 3.0 25.8 1970 26.7 n.a. n.a. 4.2 30.8 1984 25.2 21.3 4.0 2.6 27.9 Employment growth (% per annum) 1963-70 5.6 n.a. n.a. 8.4 5.9 1970-84 2.9 n.a. n.a. 0.0 2.5 Share in: (%) National GDP, 1968 h 3.4 n.a. n.a. 9.2 12.6 Manufacturing value added, 1973 i 25.0 n.a. n.a. 75.0 100.0 al Ghana, Industrial Statistics (in principle, covers firms with 30 or more workers). b/ Ghana, Population Census, 1960,1970, and 1984 (compound annual growth rate is used to estimate population in non-Census years). c/ Estimated as a residual by subtracting employment in the small-scale survey and Industrial Statistics from projected Census employment figures. _/ Ghana, Area Sample Survey of Small Manufacturing Establishments - 1963 (includes both rural and urban establishments). ef Checchi and Company, Small-Scale Industry Development In Gbana (1976). Urban small-scale employment is estimated by applying coefficients from William F. Steel's 1973 survey in three cities of different sizes to Ghana's total urban population by size group. Rural small-scale employment is calculated as a residual and includes organized firms. fl Self-employed without employees and unpaid family vworkers. g/ Calculated as a residual. h/ Ghana, National Income of Ghana at Constant Prices: 1965-68 (1973). y Checchi and Company, Small-Scale Industry Development In Ghana (1976). - 6 - A substantial number of firms complain of demand-related problems--either weak demand or too much competition. Demand problems vary by subsector and are more likely to affect activities with relatively low barriers to entry. Difficulty in collecting from customers who purchased on credit is a related problem for some firms. Most studies mention apprenticeship as a significant part of Ghana's SSEs. Apprenticeship bernefits both master, by providing low-cost labor involving little cash expenditure, and apprentice, by providing practical training, especially for urban youth who cannot afford to continue their formal education. Apprentices account for a major share of SSE employment, especially in clothing, carpentry, vehicle repair, and other repair activities. While absorbing surplus labor, however, apprenticeship also generates rapid expansion of these trades; according to one survey, 43 percent of apprentices go into business for themselves (Hakam, 1978). As a result, the number of SSEs tends to grow faster than demand for their goods and services--which comes primarily from the lower-income population. Some surveys note that the average age of SSEs is much less than that of large-scale firms and that the average size of newer SSEs is smaller than that of older ones. SSEs played a particularly important role in absorbing the rapid growth of women seeking employment in the 1960s in response to falling real family incomes. Female labor force participation rose from 57 percent in 1960 to 64 percent in 1970 (male participation fell from 89 to 84 percent), with most of the increase in self-employment, especially in food processing (Steel, 1981). Women's share of manufacturing employment rose from 42 percent to 52 percent. Although SSEs and large import-substitution industries generally serve different clientele, when production in the latter has been severely constrained by the lack of foreign exchange for imported inputs, SSEs appear to have moved in to fill the gap (Anheier and Seibel, 1987). When the large-scale industries recover, marginal SSEs can be expected to be forced out. In some activities, however, SSEs appear to be quite efficient, especially when they make use of local agricultural products and waste material. Several studies note that Ghana's SSEs achieve efficiency through clustering or subcontracting arrangements that enable each to specialize in a different phase of the production process (especially in vehicle repair and shoemaking). Such direct linkages, however, rarely occur between large and small firms in Ghana. The Economic Recovery Programme and its Impact Ghana introduced an Economic Recovery Programme in 1983 to redress some of the causes of its long economic decline. Several of the key elements of the ERP had conflicting implications for industry. Import liberalization (supported by adjustment lending) gave industries access to previously restricted inputs and spare parts, but also broadened competition from imported products. Massive realignment of the highly overvalued exchange rate made import liberalization possible by drastically reducing importers' excess profits and greatly improved the prospects for export industries, but adversely affected most industries by sharply raising the price of imported inputs and the cost of financing them. In principle, price liberalization permitted firms to pass through higher costs, but in practice many could not because demand was restrained by stabilization measures and competition from imports was high. Because the ERP policies involved major shifts in relative prices, their effects have differed markedly between different types of activities. In the aggregate, large-scale manufactured output has recovered rapidly--although not yet to its 1977 level (Table 3). Industries that have responded well include wood products, metal products, and beverages. Even within these subsectors, however, many firms remained severely squeezed by increased competition from imports and the lack of additional credit to finance increased working capital needs and new equipment.I Large-scale industries that have continued to suffer 4/ The manufacturing sector did increase its aggregate share of total bank credit from 22 percent in 1983 to 33 percent in 1989 (Ghana Statistical Service, Quarterly Digest of Statistics 7 (1), March 1989, pp. 31-32). Most of this increase reportedly went to meet rising working capital requirements of existing clients. -7- include steel, paper products, and textiles and garments. New investment in the large-scale sector has remained low: the public sector is trying to reduce iits holdings; existing firms still have unrepatriated profits; and new foreign investors remain wary. But some firms are investing to replace outmoded equipment, which is beginning to constrain their abilily to continue raising capacity utilization. Table 3: Large-Scale Manufacturing Production and Capacity Utilization, 1977-88 1977 1983 1984 1987 1988 Index of manufacturing production (1977=100) 100 35 39 57 62 Average capacity util- ization (%) 43 30 18 35 40 Source: Ghana Statistical Service, Quarterly Digest of Statistics Vol. VII, No.1, March 1989. Data on trends in small-scale manufacturing are non-existent. A 1988 survey by Jonathan Dawson of 672 small firms in Kumasi provides some information on the impact of the ERP and the potential of SSEs (see Annex A for a fuller discussion). Most of the firms interviewed reported a decline in demand resulting from depressed purchasing power among the poor and increased competition for their business. The competition came more from the entry of additional workers seeking a source of income than from the recovery of production in larger firms or from imports. Small firms also had difficulty absorbing the increased prices of both imported and domestic inputs, which rose as devaluation and price liberalization raised the incentive to produce tradable goods. Competition among the smallest ("microenterprises") has been intensified by the apprenticeship system, which provides surplus labor with the minimal skills necessary to establish their own enterprises. Nevertheless, some small businesses have adapted successfully through innovative use of local materials to exploit particular market niches. Dawson was more optimistic about the potential for growth among a new group of better educated and trained entrepreneurs in small-sized firms. He identified a substantial core of entrepreneurs with the technical skills and ability to increase the sophistication of local production and the means to acquire more technologically advanced equipment. Even outside this core, he found that the technology base had advanced significantly in terms of more skilled, salaried workers and power-driven equipment (some of it manufactured locally). Dawson found that the number of microenterprises had grown rapidly--indeed, more rapidly than demand for their services--financed mainly from personal and family sources. However, expansion of small firms with more dynamic potential was constrained by lack of access to adequate finance for their larger investment and working capital needs. He concluded that formal institutions generally were not well adapted to the needs of small firms, nor were entrepreneurs aware of their services. Apart from finance, however, the weak institutional structure did not appear to be a binding constraint on SSEs. The Survey: Rationale and Methodology The survey covered in this paper was undertaken to obtain more information on the dynamics of SSEs in Ghana and the impact of the ERP. A particuilar concern was to distinguish between the dynamic role that some SSEs can play in raising productivity and the more static role of many smaller firms (especially microenterprises) in providing individuals with a means of earning a living. -8 - One dynamic issue is whether changes in the institutional environment can facilitate development of a larger, more productive small-scale sector. The relative paucity of SSEs in Africa is sometimes seen as a 'missing middle" that must be developed as a basis for sustained growth of industrial production in larger firms (Kilby, 1988). To be dynamic, SSEs need to be integrated into an institutional framework that provides information on opportunities and finance to take advantage of them. This institutional system must help firms achieve and maintain their competitive positions through specialization in production, better management systems, marketing, and application of productivity-raising technology and equipment. These characteristics tend to be associated with larger firms--in part because the formal institutional framework is designed for them. The importance of small firms in providing income-earning opportunities outside formal wage employment is reflected in the growing attention to microenterprises and the 'informal sector." Although not susceptible to precise definition, these terms refer to activities that people undertake more for subsistence than as a growth-oriented investment. Characterized by easy entry, these activities are a critical safety valve for employment of the rapidly-growing African population. From a social perspective, expansion of the sector may be more important than growth of individual firms. The issue for economic growth is whether additional entrants of this type add to aggregate sectoral income, or simply take away from the income of incumbents. A survey was designed to investigate the characteristics of different-sized enterprises in the Ghanaian context and the differential effects of policies on them. Interviews lasting one to two hours were conducted with 82 entrepreneurs in different subsectors, towns, and size categories. Microenterprises, defined in the Ghanaian context as having fewer than 4 workers, were hypothesized to serve more as a safety valve for surplus labor and to be less dynamic in the context of the ERP. Potentially dynamic entrepreneurs were thought more likely to be found in small-scale enterprises, defined as having 4 to 29 workers. Some larger firms were also included in the sample for comparison. Characteristics of the sample are presented in the next section. The rest of paper analyzes the survey data to address the following questions: * To what extent are microenterprises and SSEs primarily a means of survival and to what extent do they provide a seedbed for dynamic industrial growth? a What have been the differential effects of the ERP and responses to it by size group and subsector? * Is the environment conducive to sustained growth of industrial production and investment? * What are the most important constraints on supply response, and do the appropriate measures to address them vary by size and subsector? The characteristics of entrepreneurs and of firms by size categories are presented in Sect:ion II. Section III analyzes firms' responses to the adjustment process and constraints to future growth. Section IV discusses entrepreneurs' views of the business environment. -9- II. CHARACTERISTICS AND PRODBLEMS OF SAMPLE FIRMS The objectives of the survey of small-scale enterprises (SSEs) in Ghana were to: * learn more about the dynamics of smalll firms and their owners; * analyze the ways in which SSEs and microenterprises have responded to shifts in the Ghanaian economy associated with the economic downturn of the early 1980s and the economic recovery program initiated iDn 1983; and * identify constraints to the future growth of small firms. This information is needed to help identify appropriate policies and assistance measures to accelerate the rate of growth and labor absorption by SSEs. The survey was conducted in four locations to represent a cross-section of urban/rural and growing/stable settings. Data from the questionnaires were analyzed for the sample as a whole and for subsets according to firm size (micro, very small, small, and medium/large), date of start-up (pre-1984 and 1984-1989), and six predominant subsectors (food processing, soap and cosmetics, metal products, textiles and garments, wood and wood products, and building materials excluding lumber).N In the absence of results from the 1989 census of small-scale enterprises, it was not possible to select a statistically representative sample. An effort was made to represent the range of activities typical of small employment. Table 4 compares sample characteristics to available naltional statistics by subsector. 5J Thirty-nine sample firms were located in Accra and Tema, Ghana's capital and primary industrial area and one in Kumasi, a major city in the center of Ghana. The rest were outside the principal urban centers: 25 in Nsawam, a sleepy town an hour north of Accra; 10 in Oda, located in a timber-growing region; 7 in Mankessim, a small trading town in an agricultural area. The oldest firm started in 1950 and the most recent in late 1989. Forty-eight firms (59 percent) were started prior to 1984 and thirty-three (41 percent) began operations between 1984 and 1989. Firm size is measured alternatively by the current number of workers and by the value of monthly sales. The number of workers in sample firms ranged from 1 to 45. Following statistical divisions used in Ghana, the sample contains 33 microenterprises (fewer than 4 full-time workers), 42 SSEs (4-29 workers), and 7 medium and large firms (30 or more workers, the criterion for inclusion in the Industrial Statistics). SSEs are further sub-divided into 26 'very small" (4-9 workers) and 16 small firms (10-29 workers; 10 being the criterion for inclusion in the Labor Statistics). Although the latter category is sometimes called "medium-scale' in Ghana, this term is applied here to firms with 30-99 workers for comparability to other countries. In terms of monthly sales, the sample contains 39 firms with monthly sales of C100,000 (US$333) or less; 25 firms with sales between C100,000 and C1,000,000 (US$3,333); 11 firms with sales between C1,000,000 and C5,000,000 (US$16,667); and 6 firms with sales greater than C5,000,000. Sixty-six of the 82 firms surveyed fall into six subsectors: food processing (15); metal products (15); wood and wood products (13); textiles and garments (9); soap and cosmetics (7); and building materials (7). Textile firms were in tie-dyeing and kente weaving, not cotton cloth manufacture or printing. Remaining activities include: goldsmithing, canework, pottery, footwvear, chalk, printing, upholstery, and drum-making for marching bands. - 10 Table 4: Distribution of Firms and Employment by Manufacturing Subsector Source and Food Texiles, Soap and Building Wood Metal Category processing garments cosmetics materials products products W Other Total Number of sample firms Total 15 9 7 7 13 15 16 82 Female owned 7 6 1 1 0 0 0 15 Employment in sample Total 175 111 117 81 85 113 180 862 In female awned firms 33 98 2 7 0 0 0 140 Percentage distribution No. of firms Sample 18.3 11.0 8.5 8.5 15.9 18.3 195 100.0 Female owned 46.7 40.0 6.7 6.7 0.0 0.0 0.0 100.0 Small (1963) b/ 36.9 33.0 n.a. na. 12.2 18.1 8.1 100.0 Recorded (1987) JY 16.3 31.1 1.1 4.1 d/ 4.8 14.0 28.6 100.0 Employment Sample total 20.3 12.9 13.6 9.4 9.9 13.1 20.9 100.0 Women in sample 23.6 70.0 1.4 5.0 0.0 0.0 0.0 100.0 Small (1963) h/ 36.9 33.0 n.a. na. 12.2 18.1 8.1 100.0 1984 Census e/ Large-scale U 20.9 19.1 5.8 4.6 25.2 5.3 19.1 100.0 Small 43.5 23.8 3.9 3.5 8.7 3.3 13.2 100.0 Total 41.3 23.4 4.1 3.6 10.3 35 13.7 100.0 Women 55.5 22.2 3.5 4.3 2.9 0.2 113 100.0 n.a. = not available (included in 'other"). a/ Includes machinery other than electrical and transport. b/ Source: Ghana, Area Sample Survey of Small Manufacturing Establishments-1963. Similar to the size range covered in this study. cl Source: Ghana, Industrial Census, 1987. Primarily medium- and large-scale firms, with some small firms also covered. d/ Non-metallic mineral products (including pottery). e/ Source: Ghana, Population Census, 1984, Table 21. Represents total manufacturing employment, including self-employment. y Source: Ghana, Industrial Statistics, 1985-86. Small is calculated as a residual. Source: Annex C The Owners The youngest entrepreneur interviewed was 22 years old and the oldest was 80; the average was 41. T.%e average number of school years completed for all firm owners was ten. Fifteen percent of owners have had no formal education; 45 percent have completed middle school and 17 percent have completed post- secondary training. Forty percent of the sample have worked as apprentices for 2 to 5 years. Only 10 - 11 - percent of the sample has participated in any type of government training program. When asked how they learned to run their businesses, 40 percent said through apprenticeships, followed by "from parents and relatives' (22 percent) and 'by trial and errore (21 percent). Education Reflecting increased education among Ghanaians, owners of more recently established firms of all sizes have completed more years of school than have the owners of older firms. The number of newer small firm owners who have finished middle school is twice that of pre-1984 owners (60 percent versus 29 percent). Owners of more recently established microenterprises also are better educated: 75 percent of the post-1983 sample have completed middle school versus 29 percent of pre-1984 owners, and 44 percent have participated in apprenticeship programs versus 25 percent of owners who started up before 1984. The increasing proportion of educated entrepreneurs suggests that choosing to work in business is receiving greater social acceptance. Relatively high education levels among microentrepreneurs also reflects a substantial reduction in formal sector alternatives for secondary school graduates and skilled workers. Levels and types of education and training differ by subsector. Entrepreneurs in less formal and more traditional industries in Ghana, i.e., metal and wood products and textiles and garments, rely more on apprenticeships than on formal education to provide them with the skills they need. In addition, 40 percent of people producing wood products, 33 percent of metal workers, and 11 percent of textile and garment producers have progressed beyond secondary school. In contrast, owners of firms producing soap and cosmetics and building materials seldom have trained as apprentices but have progressed further in school. About 84 percent of those producing building materials and 67 percent of entrepreneurs producing soap and cosmetics have completed post-secondary training. Entrepreneurship A case can be made that there is no shortage of entrepreneurs in Ghana and that a new generation of entrepreneurs is emerging, partially in response to an environment that offers greater freedom and opportunities for private business and fewer prospects for civil service than previously. Many firm owners interviewed are highly entrepreneurial in that they have departed from the paths of their parents, are able to perceive opportunities, and are willing to take risks. In response to the question "Why did you go into business?," 37 percent of the total sample responded that they "saw a profitable opportunity and took it;" followed by 21 percent who said "training prepared you for business;" 17 percent who saw "few job opportunities elsewhere;" and only 14 percent who chose business "because their parents were in business." The most marked shift is found in newer small firms whose owners are going into business because they have been trained to do so (43 percent vs. 13 percent of pre-1984 owners). None of the parents of the post-1983 entrepreneurs in middle-sized firms was in business versus 38 percent of pre-1984 owners. As discussed in the next section, this group of recently established small firms appears to be the most dynamic of all groups surveyed. A continuum of entrepreneurs can be envisioned, with those at one end driven mainly by the supply of labor and those at the other driven mainly by consumer demand for their products. The former generally are seeking income for survival and are artisanal in nature, e.g., metal products and repair, furniture, tie and dye fabrics, made-to-order garments, simple food processing, and crude soap-making. They tend to rely on apprenticeships for their training with relatively few years of formal schooling and, to a great extent, they follow the paths of their parents. Many are microefiterprises that operate in informal settings, e.g., roadsides and backyards. The general impression from interviews was that most of these small and micro- enterprises have not adapted to changed circumstances in the Ghanaian economy, but rather have continued production much as in times past. Many microenterprises, both new and old, fit into this first group. Production in most has declined or stagnated since 1983 (Table 5). There is evidence thiat this group has grown in numbers in Ghana as more people have sought self-employment in response to falling real incomes and scarce opportunities. - 12 - Incomes have recovered somewhat since 1983 but have not yet reached former levels or stimulated a surge in consumer demand for manufactures among low-income and rural people, the major customers for maicro- enterprise products. As a result, it appears that a slowly growing pie is being cut into ever smaller pieces in an enlarged microenterprise sector. Survey data indicate that new microentrepreneurs have made greater use of apprenticeships than older ones, perhaps partially in response to the fears of low-income parents for their childrens' futures. If, in fact, the markets for many traditional microenterprise products are saturated and the size of the pie does not expand more rapidly, the slices will become even smaller and years spent in apprenticeship programs will not be particularly productive. Prospects will only improve when the growth of consumer demand outstrips the net rate of entry. Table 5: Changes in Production Since 1983, by Period of Establishment (percentage of respondents in each category) Micro Very small Small Production has: Pre-84 1984-89 Pre-84 1984-89 Pre-84 1984-89 Increased 29 34 31 70 33 43 Same 6 20 25 10 0 43 Decreased 65 46 44 20 67 14 Note: "Pre-4" designates firms established before 1984. A good example of the plight of some microentrepreneurs is a seamstress who compensated for the decline in demand for garments by offering apprenticeships to young girls in town. She has 37 apprentices who learn on sewing machines leased by their parents. There are no orders for garments and no fabric to be seen; the girls learn to sew on paper bags. The seamstress has solved her immediate need for income but may have ensured tougher times for herself in the future by training her competition. The girls' futures probably will depend more on the overall growth of income among Ghana's poor and working clasi than on their abilities as seamstresses. At the other end of the continuum are firm owners who are highly entrepreneurial. Some are highly educated, and a number have left large companies to start their own businesses. Presumably, they have chosen this route because opportunities are scarce elsewhere, confidence in the stability of the government and the economy has grown to the point where they are willing to risk their resources, and they are stimulated by the challenge of working on their own. Their goals go beyond basic income generation to the building of enterprises and the accumulation of profits. They are better educated, both formally and through significant past job experience, and far more dynamic in the sense that they demonstrate a keen ability to recognize opportunities in the rapidly changing Ghanaian economy and a willingness to act on their perceptions. Most started small but moved up, some more quickly than others. They have found profitable niches through an ability to adapt quickly to changing market circumstances and technologies. They often produce specialized, non-traditional items such as freezers, water coolers and drums, or undertake innovative processing of local materials. Many of these highly dynamic entrepreneurs have built their enterprises in direct response to the new business environment in Ghana. Within each size category, new firms established since 1983 have had a greater tendency to grow (Table 5). As imports were liberalized, new firms sprang up to supply low-cost substitutes. Examples include knives made from used band saw blades and discarded metal packing strips, low quality pottery and kitchen utensils, locally mixed paints, and simple agricultural implements. With devaluation of the cedi, prices of imported inputs rose and many of the more dynamic entrepreneurs sought - 13 - ways to make greater use of local raw materials. Successful examples include the use of crushed oyster shells to obtain quick lime for locally made paint, a new method of processing local clay to make bricks, utilization of locally-produced aluminum sheets to produce low-cost filing cabinets and reworking of scrap metal to make trunks, water coolers and commercial Ireezers. Devaluation has also resulted in a rise in the price of exports generally, and of timber specifical]ly. New, small sawmills are buying logs from those with timber concessions and sawing them into lumber which they then sell to larger exporting firms. One enterprising individual collects mountains of sawdust from the large sawmills and compresses it into briquettes that serve as low-cost substitutes for charcoal. Table 6: Distribution and Age of Firms Surveyed by Size and Gender of Owner Number of firms Distribution (%) Average age (years) Size Male Female Male Female Male Female category a/ owned owned Total owned owned owned owned Microenterprises 26 7 33 38.8 46.7 6.7 17.3 Very small 20 6 26, 29.9 40.0 8.9 6.3 Small 16 0 16 23.9 0.0 143 n.a Medium/large 5 2 7 7.5 13.3 19.4 13.0 TOTAL 67 15 82, 100.0 100.0 10.1 12.3 a/ Size is classified by the number of full-time employees in 1989: 0-3 workers = miacroenterpise; 4-9 = very small; 10-29 = small; > 30 = medium/large. Women Women own 15 (18 percent) of the 82 firms surveyed. They are concentrated in food processing and textiles and garments, as they are in the economy as a whole (Table 4), and they tend to be found mostly in micro and very small enterprises (Table 6).-' The problems women face in business in Ghana arise more in relation to their very small size in these easy-entry activities than from gender-related issues within these groups. In the sample as a whole, women entrepreneurs are less educated than their male counterparts: 33 percent of the sample have never been to school (as against 9 percent for men) and they average only 6.8 years of education (as against 10.9). Curiously, however, women in microenterprises have a relatively high level of education compared to their male counterparts (43 percent with 12 or more years of schooling as against 28 percent) and to women in larger enterprises (13 percent). Furthermore, the average age of female-owned microenterprises is very high (over 17 years) relative to the age of both male-owned micro- enterprises and larger female-owned enterprises (Table 6). One interpretation is that many women may view successful self-employment as a satisfactory, permanent source of income rather than as a step toward expansion. Another is that women are limited in their abilities to expand their enterprises by other substantial demands on their time. Whereas the educational level of recent male entrants is higher than that of those who started before 1983, recent female entrants are more likely never to have attended school (50 percent vs. 27 J/ In one of the two medium/large firms, the workforce consisted of 37 apprentice seamstresses, and the principal activity was as much training as manufacturing. None of the firms in the separate survey of large-scale firms was female-owned. - 14 - percent). This suggests that women may be going into business more for lack of viable alternatives, whereas new male entrepreneurs are more likely to be applying their skills to exploit new opportunities. The average age of male-owned firms increases steadily with size, suggesting that those who stay in business tend to grow. Women are much more likely to employ other women than are men. Excluding the entrepreneurs themselves, 47 percent of workers in female-owned establishments are women, as against only 22 percent in male-owned establishments. The overall share of women in employment in the sample (28 percent) is less than for Ghana's manufacturing sector as a whole (42 percent in 1960 and 52 percent in 1970).W The Firms Few of the firms surveyed are part of an informal sector as it is generally understood.2/ The great majority of firms surveyed are indigenous, sole proprietorships that are registered and tax-paying. ]Ninety- nine percent of sample firms are private and wholly owned by Ghanaians. Seventy-three percent are sole proprietorships; 10 percent are partnerships; 5 percent are corporations; and 11 percent are organized in other forms. Only 12 percent of sample firms are not registered with any national or local government organization, and just 15 percent reported that they do not pay taxes. Even among microenterpnses, 69 percent are registered as businesses and 82 percent pay taxes (if only to the District Council). About 80 percent of all firms surveyed have bank accounts (including two-thirds of microenter- prises), and nearly half have requested a loan from a financial institution during the past five years (generally without success). About a third of medium and large scale firms have, at one time, had a bank loan. The overwhelming source of finance for smaller firms is personal savings supplemented by funds from family and friends. Informal sources of credit played no discernible role. The use of public services--electricity, water and telephones--is surprisingly low. Twenty-five percent of the total sample use no services at all; 31 percent use only electricity, and 17 percent use only water. Among microenterprises started up since 1983, 47 percent use no public services, compared with 18 percent of earlier firms. None of the newer microenterprises uses electricity. The newer microenterprises evidently are operating on a more ad hoc basis, with margins that are too small to afford utility bills and with technologies that are at quite low levels. Sources of Inputs Twenty-two percent of firms import no raw materials and 22 percent import all of their raw materials. On the average, the proportion of imported raw materials used by microenterprises arnd very small firms (20 percent) is about half that used by larger ones (Table 7). This differential is a result mainly of differences within two subsectors (metal products and soap and cosmetics) and the concentraition of smaller firms in subsectors with low import content. In the other four subsectors, the import share in the larger firms is similar to or less than that in smaller ones. Wood products has the lowest imported input The latter figures are based on population census data and include workers in the home. See William F. Steel, "Female and Small-Scale Employment under Modernization in Ghana," Economic Development and Cultural Change, 30, 1 (October 1981), p. 164. 2/ Although many of these firms appear 'informal" in the organization of their production process, the term cannot readily be applied in the sense of operating outside the legal system. Many gradations of "formality" in different aspects of business operation were observed. Hence we have avoidled the term "informal sector" and instead used size categories that can be objectively (if arbiitrarily) measured. - 15 - share (10 percent) and soap and cosmetics has the highlest (55 percent). Firms established since 1984 tend to have a slightly lower import content than older firms (24 percent versus 28 percent).AW Table 7: Import Content of Raw Malterials by Subsctor and Firm Size (percentage of raw materials that is imported) TaCiles Soap Food and Wood and Building Metal All Size category processing garments products cosmetics materials products subsectors Micro & very small 20 28 10 47 19 10 20 Small, medium & large 17 20 10 70 13 39 42 Total sample 19 26 10 55 17 18 27 Input-output linkages between SSEs and the large-scale sector exist but are limited. Twenty-seven percent of the firms sampled reported that they buy regularly from large firms. The proportion varies more by subsector than by size. Nearly half of soap and cosmetics and building materials firms purchase raw materials from large firms, whereas wood and metal workers rarely buy from large firms. Direct linkages where small firms specialize in inputs for other firms were rarely seen among the firms surveyed. The two most prominent examples are a quicklime producer who supplies paint manufacturers and a producer of starch for textile manufacturers. Markets A high level of interaction takes place across firm sizes in marketing finished goods. Except for microenterprises, which generally retail their own products, a large percentage of firms sell to other businesses. Examples include small sawmills selling lumber to large mills to help them meet orders and producers of finished garments selling to large retail department stores. Some shifts in markets are evident in the fact that newer small-scale firms sell far less to rural people (14 percent versus 38 percent) and far more to other businesses than the pre-1984 firms (57 percent versus 11 percent). As successful small- and medium-scale firms have moved away from rural markets, new very small and micro firms have moved in- -40 percent of new very small and micro firms sell in rural areas versus just under 20 percent of older firms. Medium and large firms sell mostly in Accra; small firms sell mainly in markets in surrounding towns; and microenterprises sell in their local markets. Different size firms sell to different customers: medium and large firms sell mainly to middle-income people followed by other businesses; small firms sell first to other businesses and second to rural people/farmers; microenterprises sell equally to rural and urban low-income people. Subsector analysis shows that almost half of soap and cosmetics producers sell to rural, low income customers. Interviews confirmed that some producers in this subsector have dealt successfully with growing import competition by producing cheap substitutes--soaps and hair creams--for low-income people. Wood products consist mostly of furniture for medium and low income people--again, a cheap substitute for imported, higher quality furniture. Textiles and garments are an exception in that they sell fairly equally across all income groups. Metal workers divide into two groups: those that sell basic agricultural LO/ If the import content of large firms interviewed in a separate survey (that looked exclusively at large firms and was conducted during the same mission) is included, the use of imported raw materials drops from 39 percent among pre-1984 firms io 24 percent for post-1983 firms. - 16 - implements to rural people and those that have broken into new markets, particularly those associated with the construction industry. Capacity Utilization Eighty-six percent of the firms surveyed were operating at 50 percent or less of capacity, with an average of 36 percent.1y Slightly higher rates are found among the newer small firms (42 percent), and slightly lower rates in the medium/large firms and in the more recently established microenterprises (27 and 32 percent, respectively). Variations are much greater within than between subsectors: * Among food processing firms, fish-smokers and bakers have the lowest capacity utilization rates; firms that produce fruit juices have the highest * Seamstresses who make women's clothing are working at very low levels because of easy entry into the subsector and competition from imported used clothing. * Those who build furniture for low-income consumers are working far below capacity, mainly because people in their markets cannot afford to buy furniture. * Small sawmillers could sell more but cannot obtain enough logs from those with timber concessions. * Producers of disinfectants and some varieties of soaps are operating at a fraction of their capacity, due to competition from imports and the cost squeeze on priced imported inputs. Those who are producing either low-grade or luxury soaps and cosmetics are thriving. * Metal workers who make cassava grinders and simple agricultural implements are surviving only because of their repair services, due both to competition from imports and to lack of demand among rural consumers. Those metal workers who have developed new products for the construction industry or well-adapted agricultural machinery could sell more but are kept at low production levels primarily by lack of working capital. Problems Firm owners were given the opportunity to state the foremost problem affecting their business and then to list up to three others. Lack of credit for raw materials is the single most serious problem cited by 23 percent of all firms surveyed. Lack of demand is the biggest problem for 17 percent of firms, followed by lack of credit for equipment (11 percent), high price of local raw materials (7 percent), too many other firms in the same business (6 percent), and lack of local raw materials (6 percent). Lack of credit is the largest problem for small firms, whereas microenterprises see lack of demand as a more important problem than lack of credit. Medium/large firms cite the high price of imported raw materials as their biggest problem. Although they are more able to get credit to cope with this problem, they are less able to pass on the increased cost, presumably because of import competition and depressed demand. Tables 8 and 9 aggregate all four problems mentioned by firms, sorted by firm size group and by subsector. Lack of credit is the most commonly cited single problem by all firm sizes except for microenterprises, which give equal emphasis to demand and rank competition from other firms (a demand- related problem) as their third most common problem. The growth potential of small and very smaill firms fli It is difficult to define capacity accurately in small, artisanal firms with relatively little fixed capital. Firms were asked how much more they could produce with their existing equipment if they could sell everything they produced. Low rates are to be expected among microenterprises, in which low entry barriers lead easily to market saturation. - 17 - is seen in the relatively low percentages that mention demand-related problems and their relatively high concern for replacing old equipmenL Table & Major Problems in Current Operations by Firm Size (percentage of respondents in each category) Problems J/ Total Very Medium, sample (Rank) Micro small Small large Credit Can't get credit to buy raw materials 57 (1) 55 54 63 71 Can't get credit to buy equipment 29 (3) 18 35 50 14 Demand People generally do not have enough money to buy things (lack of demand) 35 (2) 55 23 19 29 Too many other firms competing 17 (7) 21 12 25 0 People can't afford my product 11 (8) 15 12 6 0 Other demands or marketing problems 10 (10) 12 8 6 14 Input prices, availability Price of local materials is too high 22 (5) 30 23 69 14 Price of imported inputs is too high 18 (6) 9 23 25 29 Can't get enough local raw materials 11 (9) is 15 0 0 Replacement costs are too high 9 (11) 15 8 0 0 Equipment Equipment is old and needs replacing 23 (4) 12 35 31 14 My method of production is out of date 7 (12) 12 4 0 0 Infrastructure Interruption of electricity 7 (12) 6 12 0 14 Other infrastructure problems 7 (12) 3 12 13 0 Business environment Taxes 7 (12) 9 4 13 0 (Number of firms) (82) (33) (26) (16) (7) J/ Firms could list up to four problems; hence the percentages can add to more than 100 percent. Problems listed by less than 7 percent of ftrms are not shown. - 18. Many textile and garments producers are caught between a lack of demand for their product, competition from low-cost imports, and an increase in the prices of their raw materials. Sales are itoo low to generate sufficient working capital to keep up with rising grey-cloth prices. Prices of finishecd goods cannot be increased because of competition from imported new and used clothes. In building materials, some wood products (mostly milled logs), and some metal products (excluding most agricultural implements), demand is less of a problem than is finance for working capital for raw materials and investment capital for new equipment. Interpretation of these findings is not straightforward. Some of the firms that cited lack of finance as their principal problem also stated that they would not take a loan because they would have difficulty in selling enough to pay it back, or that if sales increased they would not need credit. The relative importance of weak demand and large number of competitors for microenterprises indicates that this sector is saturated as a result of labor supply pressures. Although credit and supply-side assistance may help individual microentrepreneurs, they will have little effect in raising sectoral incomes unless demand iises for the products of microenterprises. Demand problems cited by large firms generally stem from liberalized import competition. Much of the existing credit to industry is reportedly going to keep these firms, afloat. On the other hand, the depreciating exchange rate gives these firms some scope to compete if they can become more efficient, and credit for restructuring to lower costs could be quite productive. The area in which efforts to expand credit or provide new mechanisms appears most appropriate is for recently- established small enterprises that are successfully meeting a specialized or growing demand and are ready to expand. Table 10 presents the problems cited in a similar study conducted in 1973. The most striking difference is that access to raw materials was the most critical constraint in 1973, especially for small- and medium-sized firms, which required imported inputs but had difficulty obtaining them through the import licensing system. Shortage of raw materials is a particularly important constraint on the building materials and metal products industries, which in 1989 were among the most seriously affected by inadequate credit for raw materials. The textile industry clearly benefited from its high priority in the rationing of foreign exchange in 1973. Raw materials were a relatively unimportant concern for the textile and clothing industry in 1973, whereas the inability to buy raw materials was more serious for this subsector than any other in the more market-determined environment of 1989. Demand was a frequently mentioned problem in both periods, especially for microenterprises. In 1973 9 percent of microenterprises saw the low level of demand and 42 percent saw lack of clients as a major problem; in 1989, 55 percent cited demand and 21 percent too much competition. The microenterprise sector evidently was overcrowded even in 1973. In both periods, lack of demand was an especially important constraint on the textiles and clothing subsector (which is comprised mainly of microenterprises). Unlike 1989, credit was not seen as a significant problem in 1973, except in wood products and textiles and clothing. - 19 - Tal 9: Major Problems in Current Operations by Subsector (percentage of respondents in each category) Constraints on Textiles and Soap and Building Wood and current operations a/ Total sample b Food processing garments cosmetics materials wood products Metal products Credit Can't get credit to buy raw materials 57 27 89 29 57 39 60 Can't get credit to buy equipment 29 60 11 0 14 46 40 Demand People generally do not have enough money to buy things (lack of demand) 35 40 56 43 29 23 33 Too many other firms competing 17 33 11 0 14 15 7 People can't afford my product 11 0 33 0 0 1S 7 Other demand or marketing problems 10 7 12 14 29 0 0 Input prices. availability Price of local materials is too high 22 27 44 14 29 1S 7 Price of imported inputs is too high 18 7 22 71 43 0 7 Can't get enough local raw materials 11 13 0 14 0 23 7 Equipment Equipment is old and needs replacing 23 27 22 14 0 8 47 Infrastructure Interruption of electricity 7 7 0 0 43 8 7 Other infrastructure problems 7 0 0 14 0 23 7 Business environment Taxes 7 7 11 0 0 8 7 (Number of firms) (82) (15) (9) (7) (7) (13) (15) Firms could list up to four problems; hence the percentages can add to more than 100 percent. Problems listed by less than 7 percent of firms are not shown. 1/ Total includes 16 firms in other subsectors. Table 10. Distribution of Problems by Size and Subsector, AccwlNsawam/Aburi, 1973 (percentage of firms responding) Very Food Tatiles, Wood Bldg. Metal Problems Micro small Small Total proc. garments products mthi products Other PRIMARY PROBLEM Inputs: Raw materials 37 83 64 42 24 15 52 100 78 83 Spare parts 11 0 0 9 28 6 9 0 22 3 Demand Not enough clients 29 8 7 26 40 46 9 0 0 0 Level of demand 6 0 21 7 8 6 9 0 0 9 Labor 0 8 0 1 0 1 0 0 0 0 Credit, working capital 14 0 7 12 0 18 21 0 0 6 Other 3 0 0 3 0 7 0 0 0 0 ALL PROBLEMS a/ Inputs: Raw materials 59 92 86 63 28 39 70 117 111 109 Spare parts 21 0 0 18 48 15 15 0 33 3 Demand Not enough clients 42 8 7 37 68 62 15 0 0 3 Level of demand 9 25 43 13 8 8 15 33 22 17 Labor 1 17 0 2 0 3 3 0 0 0 Credit, working capital 21 8 14 20 0 27 36 0 0 11 Other 5 0 0 4 0 10 0 0 0 0 (Number of firms) (153) (12) (14) (179) (25) (71) (33) (6) (9) (35) W May exceed 100 percent because some firms dted two specific problems in the same category. Source: Worksheets for Steel (1977). - 21 - III. INDUSTRIAL ADJUSTMENT BY SIZE CATEGORY AND SUBSECTOR Structural adjustment policies have begun altering the structure of industrial production in Ghana. Changes in the exchange rate, trade policy, and price controls have had differential effects on incentives and profits. Some import-competing firms have had difficulty competing with liberalized imports, while others have benefited from the rising price of competing imports and increased access to imported inputs. Some firms see weak demand and increased competition as constraints on their ability to expand, while others have responded to improved export opportunities and new domestic market niches. Although both positive and negative effects are found within each size and subsector group, the differences between group averages suggest that structural changes are occurring. There is evidence both of growing dynamism at the firm level and of constraints on the realization of that potential. Many firms have engaged in adaptive behavior; new small enterprises are performing well; and almost half of the firms established before 1983 have undertaken some investment since then. Employment has recovered strongly in small and micro enterprises, although much of this growth is driven by excess supply of labor rather than production-generated demand. Despite import liberalization, domestic small firms are cited as the leading source of competition by large-scale firms as well as by SSEs themselves. Many entrepreneurs have sought new products, techniques, and markets under the stimulus of this competition, and others would do so if they had greater access to resources. A number of constraints continue to handicap even the more dynamic firms. The scarcity of credit and the absence of mechanisms to shift resources from declining firms to those with greater growth potential have limited the extent of investment to take advantage of new opportunities. Especially for larger firms, the high cost of raw materials (both domestic and imported) and of credit restrains the speed at which they can expand capacity utilization. Weak demand is a consequence of external factors and policy distortions that contributed to the sharp fall in income per capita in the decade prior to the Economic Recovery Program (ERP) and of restraints on demand under the E_RP. Certain large-scale industries such as textiles have been especially affected by decreased income and a shift toward lower-cost substitutes (e.g., used clothing). Stronger recovery of demand is a prerequisite for continued growth and renewed investment in many areas. As demand and credit problems are resolved, taxation and the business climate may become increasingly important as constraints on investment, at least for larger firms; smaller firms tend not to be very concerned with regulations. Changes in Nsawam's Small-scale Sector Since 1973 Several economic forces have shaped the evolution of Ghana's small-scale sector since the 1970s. Income per capita fell by about a quarter from 1973 ito 1987, reducing disposable income available for manufactured goods, and the scarcity of imported inputs curtailed industrial activity generally. The net effect of these changes on the size and structure of industry generally, and on SSEs in particular, is an empirical question that is difficult to assess for lack of comparable data over time. An indication of how small industry has changed since the early 1970s can be obtained by comparing data collected in this survey to similar data collected in Nsawam in 1973 (Steel, 1977). Nsawam is a town of about 35,000 whose proximity to Accra ensures competition from imports and large factories and dampens the prospects for dynamic growth. It has few large firms apart from food processing. As a market center, it suffered from the neglect of agriculture until the late 1980s, when fruits for processing and export have done well. On the whole, it probably suffered less during economic decline and benefited less during recovery than the large urban centers. Table 11: Growth, Distribution and Size of SSEs in Nsawam, 1973-89 Growth in Distribution: number of 1973 1989 Sector frms (%) (%) (%) Manufacturing Tetiles, garments -73 443 35.7 Wood products 13.0 93 9.2 Milling (corn, flour) 50.0 81 10.6 Jewelry -50.0 81 3.5 Bread 60.0 6.1 8.5 Kente 40.0 0.8 1.1 Food processing 300.0 2.0 1.8 Metal products 0.0 2.0 1.8 Footwear 25.0 1.6 1.8 Other 133.3 1.2 2.5 Subtotal, manuf. 6.3 83.7 77.4 Informal at -30.0 29.1 19.2 Permanent structure 21.2 70.9 80.8 Repairs Vehicle 43.8 6.5 8.1 Electrical 133.3 2.4 4.9 Tools -12.5 3.3 2.5 Shoe 175.0 1.6 3.9 Other 50.0 2.4 3.2 Subtotal, repairs 60.0 16.3 22.6 Total manuf. & repairs 15.0 100.0 100.0 Informal a( -19.7 24.8 173 Permanent structure 26.5 75.2 82.7 Growth in Nsawam's 29.5 - - total population Number of firms: Total - 246 283 Per 1000 people: Manufacturing - 7.7 6.3 c/ Repairs - 1.5 1.8 Workers per firm: Permanent structure - 2.8 4.0 Note: Based on number of firms with fewer than 30 workers. (-) = not applicable a/ Business conducted from house or market stall; no permanent business structure. The lower share in 1989 is attributable in large part to a shift of seamstresses and tailors from stalls inside the market to their own kiosks outside. p/ Excludes firms with no permanent structure. Data for 1989 are based on a sample survey of 22 firms. ) Would rise to 7.6 if people smoking fish and distilling akpeteshie in their homes are included (omitted for comparability to 1973 survey). -23- During the period 1973 to 1989, the number of manufacturing and repair firms in Nsawam grew by only half as much (15 percent) as population (30 percent; Table 11). Most of the net growth occurred in repairs--a reflection of people's inability to afford or to find replacements for their shoes, appliances, and vehicles. The average size of the small firms (under 30 workers) surveyed in 1989 is larger than in 1973, both overall and for most subsectors (except the declining artisanal activities). Increased labor absorption may be a response to increased labor supply pressures and to falling real wages. Ghana's economic fluctuations in the 1970s and 1980s have had a generally adverse effect on small firms in Nsawam. The number of manufacturing firms fell from 7.7 to 6.3 per 1000 persons.U Kente weaving and goldsmithing suffered absolute declines. Although these are traditional artisanal crafts, they depend completely on imported dyed yarns and refined gold and they can be considered luxury products for which cheaper substitutes are readily available. The number of garment makers (mainly self-employed seamstresses and tailors) also declined, although this remains the dominant small-scale manufacturing activity. The greatest growth has come in processing of local food (including corn milling and bread baking, although the latter depends indirectly on imported wheat), from 15 percent of all manufacturing firms in 1973 to 22 percent in 1989--perhaps a reflection of improved agricultural prices and supplies in the 1980s. The evidence from Nsawam suggests substaintial structural change within the small-scale manufacturing and repair sector since 1973. On balance, negative forces (especially lower income per capita and higher costs of inputs) appear to have outweighed positive ones (reduced competition from large firms, higher cost of competing imports). The latter conclusion, however, does not necessarily apply to towns where dynamic opportunities are greater. Patterns of Employment Change: 1989 Survey The effects of different policy regimes before and during the ERP on different size categories are illustrated in Table 12, which shows the average annual growth in total employment during 1975-83 and 1983-89 for sample firms established by 1975.0 During 1975-83, incomes fell and import controls were tightened as foreign exchange became increasingly scarce. Nevertheless, employment grew at 7.6 percent a year in the medium- and large-scale firms in the sample, presumably because imports were channeled to these firms and because the government maintained strong pressure on both public and private sector firms not to lay off workers. Microenterprises and SSEs, however, lacked government protection and suffered stagnant or declining employment as incomes and their access to inputs fell. L2/ The 1973 survey found that the number of small-scale businesses per capita tends to increase with city size, although the number of small firms in manufacturing was lower relative to population in Accra than Nsawam. It is unlikely that this decline in number of manufacturing firms per capita is attributable solely to the modest growth in Nsawam's size. L3/ Firms are classified by their employment in 1983. The year 1983 (instead of 1989, as in the rest of the data) is used here to reveal the impact aoording to firm size at the beginning of adjustment. The subsample of firms already established by 1'975 provides the most consistent picture over time. Total employees (rather than full-time workers only, as in other tables in this paper) are used to classify firms as medium/large (30 or more), small (10-29), very small (4-9), and micro (1-3). See Annex B for additional details. 14/ These data are at the individual firm level. It is likely that total production and employment were falling in the large-scale sector as some firms shut down. Conversely, aggregate employment in microenterprises and SMEs may have increased, as people sought alternative and supplementary sources of income. - 24 Table 12: EMPLOYMENT GROWIH BY FIRM SIZE, 1975-83 AND 1983-89 (weighted average annual percent growth) Funms establisbed by 1975 Growth since start Estab. Estab. Number 1975-83 1983-89 by 1983 1984-89 Microenterprises 4 0.0 16.0 9.7 7.6 Very small 7 -0.2 6.2 1.3 45.1 SmaU 9 0.5 3.1 8.1 19.1 MediumAarge 5 7.6 -17.2 1.1 n.a Note: Size categories and weights are based on total employment in 1983 for firms established by then. For firms established from 1984 to 1988, size categories are based on 1989 employment and weights on employment at start-up. The picture reversed sharply under the ERP from 1983 to 1989. Employment fell rapidly in the medium- and large-scale sample firms, partly because many were able to shed excess labor and partly because they were squeezed between high costs of imported inputs and greater competition from liberalized imports. Employment rose in allU the other size categories. The issue is whether increased employment per firm was attributable to expansion as smaller firms gained greater access to inputs and agriicultural production and incomes recovered, or to increased labor absorption as real wages fell and formal sector employment diminished.ly Impact of Adjustment on Production and Employment By introducing greater competitive forces and opening up export opportunities, adjustment policies are intended to yield a more efficient, dynamic structure of production by forcing inefficient firms 10 lower production costs or die out. Since Ghana's industrial sector has been characterized by inefficient large- scale firms created under heavy protection to import-intensive, import-substitution industries, a substantial negative impact could be expected early in the ERP. An overall dampening "income effect" on demand for manufactures could also be anticipated from stabilization policies. The negative effects would be mitigated to the extent that local resource-based and export industries exist and could take advantage of the incentives provided by a devalued exchange rate. These industries are favored by the substitution effect of shifts in relative prices that impose a cost squeeze on other industries. Excess capacity in these industries would enable them to expand output rapidly for some time, but their continued growth over time will depend on the ability of the financial system to shift resources to them from industries that are declining. D51 The exceptionally large increase of 16 percent a year for microenterprises may be soimewhat exaggerated because the base is very small and may include some larger firms that were temporarily operating with fewer than four workers in 1983. Also, the 1983 data may not always have included the owner in total employment, whereas the 1989 figure did. The data for firms established between 1976 and 1983 show a similar increase in employment during 1983-89 for microenterprises. Only one large-scale firm in the sample was established in this period; it shows an increase because it was only at the start-up level in 1983 and was based on local inputs. Contrary to the small-scale firms established by 1975, those established during 1976-43 show a slight employment decline, despite their relatively low import content. - 25 - Table 13 presents survey results on the impact of adjustment on production and employment, by size group according to the number of full-time wage employees in 19890 For the entire sample (first column), approximately the same proportion of firms increased production (39 percent) from 1983 to 1989 as decreased (43 percent). When broken down by size and period of establishment, however, declines in production predominated among microenterprises and SSEs established by 1983,71 whereas increases in production predominated for new SSEs and large firms from a separate survey (Table 13 and Figure 2). One sign of positive response is that firms established since 1983 have been relatively more successful in expanding output in all size groups than those already in existence. This suggests that new firms--especially SSEs--have entered relatively high-growth activities.f Significant differences in impact are apparent beiween subsectors (Table 14). Wood products had the highest proportion of firms showing an increase in both production and employment. This sector benefited because devaluation protected its high domestic value added component and enabled some firms to resume exporting, while its imported share of inputs (10 percent) is the lowest of any subsector. More than half the firms in food processing, textiles, and wood products had an increase in production in the separate survey of the large scale sector as well as in the SME survey. Building materials and metal products had the highest proportions of firms whose production declined (72 and 58 percent, respectively). The evidence suggests that some of the firms in metal products were squeezed between the rising cost of imported inputs (40 percent said that imported inputs vvere more difficult to get, greater than any other subsector, and good domestic scrap was also reported to be increasingly scarce) and competition from imports (21 percent cited imports as providing major competition). Building materials had a relatively high proportion (58 percent) of firms constrained by weak demand, and its respondents complained much more lthan those in other subsectors that government regulations had become harder to deal with (67 percent; Table 12). Demand problems may also explain why food products and textiles and garments had nearly as high a proportion of firms with decreased as increased production. A third of these firms said they could not even sell current production, and 33 percent of food processors and 44 percent of textile and garment producers cited demand as their most important current problem. 6J Compared with the classification in Table 12, firms will tend to be classified in a lower-sized group (because part-time and non-wage workers are excluded) and firms that expanded employment since 1983 may have moved to a larger group while those that contracted may have moved down. In particular this microenterprise category tends to be biased toward firms that were less successful under adjustment, while the large-scale category is biased toward more successful firms. D1/ Despite these production decreases in small firms, a strong majority reported employment increases (consistent with the labor absorption data in Table 12); see para. 3.17. j8 Although no data are available on new medium- and large-scale firms, the evidence from this study and a complementary (and more representative) survey of large firms suggests that fewer existing large firms were adversely affected by adjustment policies than smaller ones. Of the large firms in the SSE survey, the same proportion (43 percent) reported an increase and a decrease in production, while twice as many large firms in a separate survey reported an increase as showed a decrease. - 26 - Table 13: Impact of Adjustment on Production and Employment by Firm Size Firms Established by and after 1983 (percentage of respondents in each category) Size categories: / Size categories: At Large All firms scale Impact surveyed Micro V. small Small Med/large Micro V. small Small MedJlarge survey All Firms established by 1983 Firms established after 1983 Years Change in production: Increase 39 29 31 33 43 34 70 43 n.a. 58 Decrease 43 65 44 67 43 46 20 14 n.a. 29 Change in employment: Increase 62 47 56 78 71 56 80 71 n.a. 35 Decrease 16 18 25 11 29 6 0 29 na. 39 New firms as percent of all firms in sample 40 n.a. n.a. na. na. 48 38 44 0 n.a. (Number of firms) (82) (17) (16) (9) (7) (16) (10) (7) (0) (31) I/ Categories are based on the number of full-time workers in 1989 micro 3 or fewer; very small = 4-9-, smaO = 10-29; medium/large = 30 or more; data are also shown from a separate survey of the large-scale sector for which some comparable data were obtained. Figure 2 SHARE OF FIRMS WITH FALLING OR RISING PRODUCION BY SIZE AND WHEN ESTABLISHED CREATED BY 1983: MICRO __ VERY SMALL ! SMALL MEDIUM/LARGE NEW FIRMS: MICRO VERY SMALL 1 SMALL 0 1 0 20 30 40 50 60 70 O.~ DECREASING PRODUCTION _ INCREASING PRODUCTION Source: Table 13. Firms with no change are not shown. Table 14: Impact of Adjustment by Subwector (percentage of respondents in each categoq) Change since 1983 AU rmus Food Textiles, Wood Soap & Building Metal or start-up surveyed[al products garments products cosmetiks materials products Change in production: Increase 39 53 55 62 43 14 14 Decrease 43 40 44 23 29 72 58 Change in employment: Increase 62 44 71 86 25 67 71 Decrease 16 22 29 14 75 33 14 Product mix changed 36 23 50 31 83 43 29 Purchased new equipment 49 73 50 67 33 29 33 Selling in different markets 1S 7 11 15 43 29 20 Imported share of raw materials: Actual % share 26 b/ 19 26 10 55 17 18 Change since 1983: Greater 11 29 0 0 17 0 0 Smaller 17 14 0 0 17 50 0 Easier to get: Imported inputs 68 75 100 75 67 75 40 Domestic inputs 56 67 86 45 33 100 43 Harder to get or too costly Imported inputs 16 8 0 25 0 0 40 Domestic inputs 21 13 14 45 0 0 14 Credit harder to get 84 63 75 100 80 100 100 Dealing with government regulations is: Easier 39 44 50 14 0 33 50 Harder 32 22 25 57 50 67 13 Competition is greater 61 33 88 64 71 100 46 Major competition from: Imports 12 7 11 0 29 0 21 Small firms 77 71 89 100 57 84 57 Have exported (direct or indirect) 9 21 11 8 14 0 7 Have considered exporting 38 21 56 54 43 29 27 Constraint on sales: Resources (could sell more) 52 60 33 42 86 43 64 Demand: 48 40 66 58 14 58 35 Can sell current production but no more 24 7 33 25 14 29 21 Can't sell current production 24 33 33 33 0 29 14 (Number of firms) (82) (15) (9) (13) (7) (7) (15) J/ Includes firms in all subsectors. Pf Does not include 24 large-scale firms from a separate survey. With those firms included, the overall average import share is 34 percent. - 28 - Although the changes described above cannot be distinguished statistically from what might have occurred in the absence of adjustment policies, they suggest that the ERP has enabled many lirms to recover from the declining output that characterized the preceding years, while others have suffered. The recovery is partly attributable to the increased access to imported inputs through the auction system, supported by adjustment lending, but if this were the only cause, the impact would have been more uniform across the board. The differential impact both within and between subsectors suggests that only some firms benefited, while others were squeezed, as expected. One striking feature of the recovery is that a much higher proportion of firms reported an increase in employment (62 percent) than in production (39 percent). This was true for all size groups and four subsectors (Tables 13 and 14); employment growth lagged only in food products and soap and cosmetics. This result is counter-intuitive, because most firms surveyed in 1984 (primarily larger ones) complained of excess labor, so that employment need not have risen in order to utilize existing capacity more fully. The explanation may be partly substitution--real wages have eroded drastically while interest rates rose, making labor relatively cheap--and partly excess supply--labor has increasingly had to seek income-earning opportunities outside the public sector, which has laid off substantial numbers of workers. The relatively high growth of microenterprises suggests that many workers are looking to this sector for income (part- time workers account for 50 percent of microenterprise employment, as against an average of 13 percent for all firms surveyed). Only among the large-scale sample from a separate survey did a larger share of firms report production than employment increases, perhaps reflecting their need to become more competitive by raising productivity. ' Investment Response Contrary to some observers' perceptions, investment Is taking place, at least among SSEs. Nearly half of all firms established by 1983 have purchased some new equipment in the last six years (Table 15). The share is somewhat lower for microenterprises, and about 56 percent for other size groups. In addition, new firms are entering, at least among smaller ones. Nearly half of the microenterprises sampled were established since 1983 (high birth and death rates are expected in this group); 38 percent and 44 percent of the very small and small enterprises, respectively, entered since 1983 (Table 13). Adaptive Behavior Existing firms need to replace outmoded equipment that deteriorated during the late 1970s and early 1980s, when production was declining and import licenses for equipment were extremely difficult to obtain. Despite the lack of finance to replace equipment, many firms have adapted to new price incentives by altering their product lines. The product mix was changed significantly during the ERP by 34 peircent of the firms surveyed (Table 15). As the construction industry picked up, metal workers began producing metal gates and burglar alarm systems. Having lost his contract to produce chalk for the Ministry of Education to Chinese producers, one entrepreneur shifted into production of starch for the textile industry. Changes in product mix were made by the largest number of firms in the soap and cosmetics and the textiles and garments subsectors (83 percent and 50 percent of firms, respectively, Table 14). The food, wood, and metal products subsectors had less need to change because their dependence on imported inputs is low (19, 10, and 18 percent, respectively) and their products tend to be suited to individual tastes, making them less vulnerable to competition from standardized imports. 2Jt Unfortunately the data do not reveal the magnitude of the changes. - 29 - Table 15: Changes under Adjustment for Firms Established by 1983, by Size (percentage of responderits in each category) Size categories hi: All firms Question surveyed W/ Micro Very small Small Med.Aarge Bought new equipment 49 43 56 56 57 Product mix changed 34 S/ 40 27 63 45 S/ Selling in different markets 15 12 19 0 43 Imported share of raw materials: Actual % share 34.0 J 19.1 19.1 62.8 52.6 C Change since 1983: Greater 9 Y 11 11 25 8RS Smaller 28c/ 22 11 13 83c/ Easier to get: Imported inputs 73 S 89 64 50 88c/ Domestic inputs 57 Si 64 44 17 67 SI Harder to get or too costly: Imported inputs 12 J 0 18 33 0 Y Domestic inputs 20 J 21 25 33 0 S/ Credit harder to get 84 83 100 100 100 Competition is greater 61 53 64 33 71 (Number of firms) (82) (17) (16) (9) (7) a/ Includes firms established after 1983 as well as before. y/ See note a to Table 13. c/ Includes an additional 24 firms from a separate survey of large-scale enterprises. Along with changes in product mix, a number of firms are shifting their marketing strategies. Of the firms in existence before the ERP, 15 percent moved into new domestic markets (43 percent of large- scale firms; Table 15). Of the total sample, 38 percent have considered exporting, even though only 9 percent have had any direct or even indirect experience with exports (Table 16). Those who export do so on a small scale. A tie and dye producer sells a relatively small volume of her fabric to a German buyer. A producer of commercial freezers has sold several un:its to traders from Nigeria and Mali. The use of imported inputs is affected in two opposite ways by adjustment policies. First, import liberalization makes imports easier to obtain and wideni access to them beyond the large-scale firms that were favored by the import licensing system. This recovery effect should enable firms generally to increase their utilization of existing capacity. Second, devaluation has greatly raised the cost of imported inputs, and the prepayment requirement of the auction has restricted access to those firms with sufficient liquidity or credit. This substitution effect should encourage firms to shift toward local inputs over time and favor new investment in industries with high proportions of domestic inputs and value added. - 30 - Figure 3 SHARE OF FIRMS WITH CHANGE IN IMPORT CONTENT BY SIZE AND SUBSECTOR ALL FIRMS MICRO VERY SMALL SMALL MEDIUM/LARGE FOOD SOAP, COSMETICS BUILDING MTLS. 0 20 40 s0 80 100 m INCREASE IN IMPORT _ DECREASE IN IMPORT I | CONTENT CONTENT Source: Tables 14 and 15. Firms with no change are not shown. The survey indicates that 9 percent of firms increased their import content, while 28 percent reduced it (Table 15).A
Группа Всемирного банка · Publication
Small enterprises in Ghana : responses to adjustment
Открыть оригинал документа
Полный текст размещён на сайте публикующей организации. lawenc.com индексирует метаданные и ведёт на официальный источник.
Полный текст
Основные сведения
Организация
Группа Всемирного банка
Тип документа
Publication
Страна
Гана
Источник
Всемирный банк