WTP- 138VV)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

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WORLD BANK TECHNICAL PAPER NUMBER 138INDUSTRY AND FINANCE SERIES

Small Enterprises under Adjustment in Ghana

William F. Steel and Leila M. Webster

The World BankWashington, D.C.

Copyright e 1991The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing June 1991

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ISSN: 0253-7494

William F. Steel is principal industrial economist, and Leila M. Webster a small industry specialist, both inthe 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 0-8213-1822-51. 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: WorldBank technical paper. Industry and finance series (Unnumbered)HD3616.G533S74 1991338.9667-dc2O 91-17225

CIP

ACKNOWLEDGMENTS

The authors are grateful to the Industry and Energy Division of the Western AfricaDepartment 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 JohnWayem, Frederick Gyebi Acquaye (NBSSI), Ramatu Abdel-Karim, Paul-Doe Abotsi,Robertson Adjei, Allen Senyo Ahlijah, and Yaw Sah-Somuah. The data were entered andprocessed by Elizabeth Ntum (NBSSI), Alvaro Benitez de Lugo, and Kumari Jayatilleke.Word processing was done by Wilson Peiris and Anna Marafion. The authors acknowledgeuseful comments from Kwamena Adjaye, Surendra Agarwal Benson Ateng, Nancy Barry, DonMead, and participants in a World Bank seminar without implicating them in any errors thatremain.

GLOSSARY

C = cedisERP = Economic Recovery ProrammeILO International Labour OrganizationMIST = Ministry of Industries, Science and TechnologyNBSSI = National Board for Sma]l-Scale IndustriesOECD = Organization for Economic Cooperation and DevelopmentSSEs = small-scale enterprisesTCCs = tax clearance certificatesUSS = United States dollarsUNIDO = United Nations Industrial Development OrganizationUSAID = United States Agency for International DevelopmentWEP World Employment Prolgramme (ILO)

TABLE OF CONTENTS

EXECUTIME SUMMARY ........... .. ........ ...... ix

L INTRODUCTION .... .. .... 1

The Role of Small Enterprises in Industrial Development. 1The Adjustment Context. 3Evolution of Large- and Small-Scale Industry in Ghana. 4The Economic Recovery Programme and its Impact. 7The Survey Rationale and Methodology. 8

II. CHARACTERISTICS AND PROBLEMS OF SAMPLE FIRMS .10

The Owners .11The Firms.15Problems .17

m. INDUSTRIAL ADJUSTMENT BY SIZE CATEGORY AND SUBSECTOR 22

Changes in Nsawam's Small-Scale Sector Since 1973 .22Patterns of Employment Change: 1989 Survey .24Impact of Adjustment on Production and Employment. 25Investment Response .29Adaptive Behavior .29Sources of Competition .32Constraints on Adjustment .32Constraints on Future Growth .33

IV. ENTREPRENEURS' VIEWS OF REGULATORY ENVIRONMENT ISSUES 37

The Current Regulatory Environment .37Problems 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 CHANGEIN 1989 SURVEY BY FIRM SIZE AND PERIOD OFESTABLISHMENT ........... ........................... so

ANNEX C: EMPLOYMENT IN SMALL AND LARGE MANUFACrURINGFIRMS, 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 .... ....... 4Table 2: Distribution of Manufacturing Employment and Output

by Size Category. 6Table 3: Large Scale Manufacturing Production and Capacity

Utilization, 1977-88. 8Table 4 Distribution of Firms and Employment

by Manufacturing Subsector ............................. 11Table 5: Changes in Production Since 1983 ........................ 13Table 6: Distribution and Age of Firms Surveyed

by Size and Gender of Owner .14Table 7: Import content of Raw Materials by Subsector and

Firm Size ........................................... 16Table 8: Major Problems in Current Operations by Firm Size .... ....... 18Table 9: Major Problems in Current Operations by Subsector .... ....... 20Table 10 Distribution of Problems by Size and Subsector,

Accra/Nsawam/Aburi, 1973 .............................. 21Table 11: Growth, Distribution and Size of SSEs

in Nsawam, 1973-89 ......... .......................... 23Table 12: Employment Growth by Firm Size, 1975-83 and 1983489 .... ..... 25Table 13: Impact of Adjustment on Production and Employment

by Firm Size ............. ........................... 27Table 14: Impact of Adjustment by Subsector ........................ 28Table 15: Changes Under Adjustment for Firms Established

by 1983, by Size ........... .......................... 30Table 16: Adjustment Responses and Constraints by Firm Size .... ....... 33Table 17: Major Constraints on Future Expansion by Firm Size .... ....... 34Table 18: Major Constraints on Future Expansion by Subsector .... ....... 36Table 19: Regulatory Problems for Current Operation by Firm Size .... .... 38Table 20: Problems of Business Environmrent for New Investment,

by Firm Size ............. ........................... 41

FIGURES

Figure 1: Changes in the Size Structure of Industry over Time .... ........ 2Figure 2: Share of Firms with Falling or Rising Production

by Size and when Established ............................ 27Figure 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 structuraladjustment programs highlights the issue of moving from stabilization to dynamic growth. Governmentsthat have undertaken trade and industrial policy reforms expecting to create a more competitive industrialstructure are disturbed when production stagnates without visible signs of new investment to take the placeof previously overprotected firns. Aggregate trends, however, may conceal dynamic structural changes atthe subsector and firm level. To understand the determinants of supply response requires a microeconomicapproach--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 withgenerally positive results for economic growth. Industrial production in Ghana has recovered rapidly fromthe drastically constrained level of 1983, but the index of production in 1988 remains well below the peakof 1977. Within the industrial sector, the effects of structural adjustment policies have differed amongsubsectors 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 adverselyaffected by the more competitive environment. Little is known, however, about the impact of adjustmenton smaller firms, which were excluded from the previous direct allocation of resources and which arethought 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 learnmore about the impact of the adjustment program on their operations, to evaluate their potentialcontribution to dynamic industrial recovery, and to identify appropriate measures that would accelerate thegrowth 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' strategiesfor adapting to their new environments and comparing firm responses across sizes andsubsectors; and

* identify constraints to the future growth of small firms.

Survey results show that adjustment policies generally have forced Ghana's small-scale induistriesto become more competitive to survive and that significant structural changes are taking place acrosssubsectors 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]lowedby the difficulty of financing working capital and new investment. Nevertheless, there is evidence ofconsiderable entrepreneurial initiative in changing product mix and seeking market niches that have openedup under the new exchange rate regime. Some SSEs have adapted to changing demand by producingspecialty products, custom-made items, or low-cost substitutes for imported goods. Interest in exports ishigh, 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 asmight have been expected, given the extensive depreciation of the cedi--partly because SSEs already werepaying black market prices and partly because devaluation tends to raise prices of all tradable goods. SSEsfind the high price of local materials as much a problem (especially in the garments subsector) as the highercost of imported inputs. Many smaller firms have raised their share of imported inputs as liberali2ationincreased their access to imports. Some larger firms, which previously received inputs through irnportlicenses 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 overallimport content for industry.

The entrepreneurs in the sample fell into two broad groups: (i) dynamic, successful adapters withgood prospects for the future (found mostly among small- and medium-scale enterprises); and (ii) stagnantproducers who have not mastered the new environment and who seem unable to change products in theface of mounting competition (found mostly among microenterprises).

Successful firms with good prospects are found in many types of products, and it is unwise to makepredictions about likely growth purely on a subsectoral basis. The key ingredients are entrepreneurial driveand ability, which were observed in many forms. Entrepreneurs who established SSEs after the EconomicRecovery Program of 1983 tend to be better educated, more responsive to demand, and more able to seizeopportunities than owners of older businesses. These new entrepreneurs offer substantial hope for theemergence of a strong entrepreneurial class under policies that reduce the political and economicuncertainties associated with long-term fixed investment. Growth of the private industrial sector in themedium term will depend in large part on whether ithese dynamic entrepreneurs are encouraged by animproving macroeconomic environment and increasing access to finance for expansion. A strong technicaleducation 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 forworking capital and new investment. Some are ready to grow beyond the limits of self-finance, but theyremain unable to obtain the necessary funds from fonrnal financial institutions. One policy implication isthat supply-side assistance programs will have only limited impact until the financial system is restructuredto 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 strongexport 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 littleinterest in such programs.

At the other end of the scale are the many microentrepreneurs in traditional activities such assewing and carpentry. Because of public sector employment cutbacks under the adjustment program, anincreasing number of workers have no alternative to self-employment. At the same time, weak purchasingpower 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 asincreases in demand are quickly competed away.

On the positive side, micro and smaDl enterprises perform an important training function throughthe apprenticeship system. However, this supply-driven mechanism needs complementary growth in demandand training in new product lines if apprentices hope to raise their standard of living. Expenditures toincrease the number of microenterprises will have little net benefit without corresponding increases in theincomes of their customers. Regulatory reform will have little impact on microenterprises, the majority ofwhom 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, althoughmany shortcomings remain. The government is widely seen as favoring greater private investment, but manyentrepreneurs remain wary of arbitrary government interference, such as shutting some firms down or forcingsmall enterprises to relocate. Improving the tax collection system by lowering rates and reducing therestrictiveness 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 immediaterestraints on investment. Measures to expand demani at the lower end of the income scale are needed toenable 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 agrowing source of concern, especially in Africa. Many countries have reformed their macroeconomicpolicies to correct critical distortions that contributed to economic stagnation in the late 1970s and early1980s. Complementary trade and industrial policy reforms have been aimed at making previouslyoverprotected industrial sectors more efficient and dynamic. Governments frequently look to industry tolead economic recovery, but they are disturbed when they see some large firms stagnating without visiblesigns of new investment to take their place.

This study investigates the hypothesis that small enterprises play an important dynamic role in theadjustment process and in Africa's industrial development. Small enterprises are sensitive to changes indemand because many of them sell directly to customers. A low level of technology gives them theflexibility to change product lines and inputs. Thus they may be in a favorable position relative to largerenterprises to respond to liberalization of markets and changes in relative prices. A shift in relative pricesthat 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 risingproductivity. 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 transitionfrom an industrial structure based on household manufacturing to one based on economies of scale in largerindustries.

Ghana's Economic Recovery Programme (ERP) has had generally positive effects in reviving theeconomy since it was initiated in 1983. After a decade of decline, industrial production initially recoveredrapidly, especially as access to imported inputs increased. But import liberalization also increasedcompetition for some producers, leading to renewed calls for protection and an impression that the ERPis adversely affecting industry. To understand the dynamics of response to adjustment policies, amicroeconomic approach is needed--especially to assess the impact on small firms that are not included inrecorded statistics. This study addresses several questions that arise when industrial supply response fallsshort 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 ataggregate growth rates?

* Do the negative effects of policy reforms fail mainly on larger, more visible firms? Dosmaller firms tend to benefit?

* Where does dynamic potential lie, and what policies and institutional reforms can helppromote 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 normallybegins 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 cometo 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 isespecially typical of Asian countries that have successfully industrialized. Although small firms provide thebulk of manufacturing employment in most African countries and contribute from 26 to 64 percent ofmanufacturing value added (3 to 8 percent of GDP; Liedholm and Mead, 1987), they are dominated bymicroenterprises of fewer than 10 workers. Thus, some observers argue that there is a "missing middlein the size distribution of industry in African countries which must be filled for industrial development toproceed (Kilby, 1988).

Figure 1: Changes in the Size Structure of Industry over Time

iMost Africand countrZ * Xndlao omsb Turkey Korea, Euroe,

.~~~~~~~lia Japa N.AwjPdhotd I P P

an

wSmatiswon lsIo octnvdtofles

LI Tlime

I I . IoboI Phas I IPhas I I Phase II lttlzt2 on)

I I

eSmall worksbops and foctoti s

| | _, + ~~~~~~~~~~TimefM 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 modernindustrial structure through public investment in large-scale industries. A leading role for the state was seenas necessary in the absence of a strong indigenous entrepreneurial class which could industrialize withoutdepending on foreign investors. But inadequate attention to economic viability and market prospectsresulted in substantial excess capacity that is poorly integrated with the domestic economy and cannotsurvive without excessive protection or subsidies. Many of these enterprises have been squeezed byadjustment 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 sustainedindustrialization in Africa:

-2 -

* Successful industrialization must have an indigenous base, and expansion of the SSE. sectorwould help develop the experienced entrepreneurial and managerial class that is needed asa 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, astrategy conducive to expansion of the SSE sector is consistent with employment and incomedistribution objectives while allowing for sustained productivity increases throughimprovements in technology (Staley and Morse, 1965; Steel and Takagi, 1983).

* Small private industries have been repressed in the past through restrictive licensing, taxincentives for large firms, direct allocation of credit, materials and foreign exchange to largefirms (especially in the public sector), and hostility of some governments toward privateprofits; liberalization of these restraints and attitudes is likely to unleash investment inhighly 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 SSEswill be efficient because (i) they serve dispersed local markets, (ii) they lprovidedifferentiated products with low scale economies for niche markets, or (iii) they specializenarrowly 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 favordevelopments of SSEs. As discussed in the next section, the conflicting effects of stabilization andliberalization provide no clear a priori indication of how SSEs will fare. Furthermore, potential responsesto 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 thanin non-adjusting countries (taking into account the effects of initial conditions, external shocks and externalfinancing), the tendency of investment to fall in adjusting countries gives some cause for concern: fto sustainadjustment and restore growth, countries must not only reduce distortions, they must also create theconditions for the eventual increase in investment" (World Bank, 1990a, p.5). Adjustment policies affectindustries differentially, with varying incentives for investment in new capacity. Expenditure reductionpolicies tend to reduce demand for industrial products generally. Expenditure switching policies--such asdevaluation--that raise the relative price of tradables tend to favor industrial value added in exporting andimport-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 allocatedinputs, but also increases competition for many import-substitution industries. The net result for incentivesdepends on the mix of policies, how well they are implemented and transmitted through price signals, andthe characteristics (including size distribution) of individual industries.

For investors to respond to improved incentives, they must be able to obtain resources at reasonablecost and to pursue profits without undue risk. Resources include financial, infrastructural and businessservices, as well as physical inputs. Business risks are affected by the degree of economic and politicalstability and by official attitudes toward private profit. The cost of doing business is also determined bytaxation and the regulatory environment. The influence of these underlying conditions on investmentbehavior may vary considerably by firm size and the resulting extent of access to--or intervention by--officialinstitutions.

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

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as adjustment borrowing makes additional resources available, most are reluctant to invest in new capacityuntil 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 marketingservices are available, and the regulatory environment is eased, African countries will find it difficult toattract large-scale investors in industries that must compete on international markets.

Small enterprises, however, can more readily operate with low levels of infrastructural and othernontraded inputs, while providing fertile ground for their development Furthermore, small indigenousentrepreneurs are less likely to have investment possibilities outside the country. Thus, SSEs may have aparticularly important role to play in sustaining a positive investment response to adjustment policies overthe medium term--if such investments are made sufficiently attractive, financial and physical resources areavailable 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 increasingconcern for the social aspects of adjustment. Informal alctivities absorbed an increasing share of the laborforce during the 1980s as formal employment opportunities diminished, first under economic crises and thenunder public expenditure cutbacks (World Bank, 1990b). Adjustment programs increasingly includemeasures to help laid-off workers go into business for themselves, for example in Ghana, Madagascar, andMauritania (World Bank, 1990a). It is not clear, however, whether demand for the goods and servicesprovided 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 elasticdemand (World Bank, 1990b).

A consensus is emerging that the fundamental issue is how to create a policy and businessenvironment that enables small enterprises to contribute productively to industrial development, not whetherthey have a role to play (Liedholm, 1990; Schmitz, 1982). Furthermore, these conditions cannot be specifiedin 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 constrainsmall enterprises in the context of a particular country, Ghana, that is undertaking a program of structuraland 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; agricultureaccounts for over half. Nevertheless, industrial production has tended to lead growth--and decline--inGhana's economy since independence in 1957 (Table 1). It was a central focus of President KwameNkrumah's drive to modernize the economy in the 1960s through a combination of state-owned industriesand major foreign investments or joint ventures. Nkrumah's approach minimized the role of the indigenousprivate sector in industrialization both because it seemed inadequate to the task and because he wished toavoid 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 1.4Manufacturing 6.5 -2.8 1.3Agriculture 4.5 0.0 0.0

Source: World Bank, Sub-Saharan Africa: From Crisis to SustainableGrowth, Washington, D.C., 1989, Statistical Appendix, Table 2.

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Small enterprise was already a widespread source of income in Ghana. A sample survey in 1963estimated that small-scale manufacturing employed some 184,000 workers in Ghana, or about 17 percentof 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 workedin their homes). By 1973, employment in large-scale firms had doubled to 64,000 while that in small-scaleand household enterprises rose only by half to a combined total of about 364,000.Y Although small-scalefirms contributed only about a quarter of Ghana's manufacturing value added, they accounted for al least85 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 oncethe virtually exclusive domain of foreign firms and the state. According to the Industrial Statistics, thenumber of large-scale firms owned by Ghanaian citizens increased fourfold from 1962 to 1982 (rising from13 percent to 17 percent of gross manufacturing output) and the number of joint private Ghanaian-foreignfirms increased tenfold.Y

By the early 1980s over 70 percent of large-scale industrial capacity was idle, largely due to lack offoreign exchange for needed inputs. As real incomes fell and employment opportunities in large firms andthe 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 thanmanufacturing activities were favored by the large distortions between official and black market prices andby the uncertain investment climate. Nevertheless, some smali producers were effectively shielded fromimport competition by the economic crisis--for example, metal workers, vehicle repair shops and low-costfurniture makers. The more technically astute entrepreneurs succeeded through innovative use of localraw 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 notreduce 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 ofstudies (see Bibliography on Small Enterprises in Ghana).y Inadequate finance is consistently cited as aprimary problem, especially with respect to starting or expanding the business. Most entrepreneurs surveyedsought funds from multiple sources to supplement their own, but loans from banks provide no more than3 percent of SSE investment and those from informal lenders another 2 percent. Personal savings provideabout 60-70 percent of initial investment capital, with gifts and loans from relatives and friends bringing theshare of private savings to an average of 91-95 percent. Successful growth of SSEs depends on graduallyreinvesting profits from the business.

The dominant constraints on firms' ability to use their capacity once established are restricted alccessto raw materials and inadequate working capital. Low working capital makes it difficult for most SSEs tomaintain stock and generate enough profits to expand operations. Firms that have been in business forsome 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 Ghanaiancitizens. The second increase was in part attributable to the requirement that foreign firms havelocal 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; andThomi and Yankson, 1985.

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Table 2: DISTRIBUTION OF MANUFACTURING EMPLOYMENT AND OUTPUTBY 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 31,865 277,0521970 358,958 n.a. n.a. 55,899 414,8571973 363,524 309,078 e/ 54,446 e/ 64,000 427,5241984 532,585 448,651 y 83,934 gl 55,783 588,368

Distribution of employment (%)1963 88.5 22.1 66.4 11.5 100.01970 86.5 n.a. n.a. 13.5 100.01973 85.0 72.3 12.7 15.0 100.01984 90.5 763 14.3 9.5 100.0

Share of manufacturingin total non-agriculturalemployment (%)

1963 22.8 5.7 17.1 3.0 25.81970 26.7 n.a. n.a. 4.2 30.81984 25.2 21.3 4.0 2.6 27.9

Employment growth(% per annum)

1963-70 5.6 n.a. n.a. 8.4 5.91970-84 2.9 n.a. n.a. 0.0 2.5

Share in: (%)National GDP, 1968 h 3.4 n.a. n.a. 9.2 12.6Manufacturing 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 populationin non-Census years).

c/ Estimated as a residual by subtracting employment in the small-scale survey and Industrial Statistics fromprojected Census employment figures.

_/ Ghana, Area Sample Survey of Small Manufacturing Establishments - 1963 (includes both rural and urbanestablishments).

ef Checchi and Company, Small-Scale Industry Development In Gbana (1976). Urban small-scale employmentis estimated by applying coefficients from William F. Steel's 1973 survey in three cities of different sizes toGhana's total urban population by size group. Rural small-scale employment is calculated as a residual andincludes 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).

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A substantial number of firms complain of demand-related problems--either weak demand or toomuch competition. Demand problems vary by subsector and are more likely to affect activities withrelatively low barriers to entry. Difficulty in collecting from customers who purchased on credit is a relatedproblem for some firms.

Most studies mention apprenticeship as a significant part of Ghana's SSEs. Apprenticeship bernefitsboth master, by providing low-cost labor involving little cash expenditure, and apprentice, by providingpractical 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 rapidexpansion 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 andservices--which comes primarily from the lower-income population. Some surveys note that the average ageof SSEs is much less than that of large-scale firms and that the average size of newer SSEs is smaller thanthat of older ones.

SSEs played a particularly important role in absorbing the rapid growth of women seekingemployment in the 1960s in response to falling real family incomes. Female labor force participation rosefrom 57 percent in 1960 to 64 percent in 1970 (male participation fell from 89 to 84 percent), with mostof the increase in self-employment, especially in food processing (Steel, 1981). Women's share ofmanufacturing employment rose from 42 percent to 52 percent.

Although SSEs and large import-substitution industries generally serve different clientele, whenproduction 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 industriesrecover, marginal SSEs can be expected to be forced out. In some activities, however, SSEs appear to bequite efficient, especially when they make use of local agricultural products and waste material. Severalstudies note that Ghana's SSEs achieve efficiency through clustering or subcontracting arrangements thatenable each to specialize in a different phase of the production process (especially in vehicle repair andshoemaking). 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 itslong 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 inputsand spare parts, but also broadened competition from imported products. Massive realignment of the highlyovervalued exchange rate made import liberalization possible by drastically reducing importers' excess profitsand greatly improved the prospects for export industries, but adversely affected most industries by sharplyraising the price of imported inputs and the cost of financing them. In principle, price liberalizationpermitted firms to pass through higher costs, but in practice many could not because demand was restrainedby stabilization measures and competition from imports was high.

Because the ERP policies involved major shifts in relative prices, their effects have differed markedlybetween different types of activities. In the aggregate, large-scale manufactured output has recoveredrapidly--although not yet to its 1977 level (Table 3). Industries that have responded well include woodproducts, metal products, and beverages. Even within these subsectors, however, many firms remainedseverely squeezed by increased competition from imports and the lack of additional credit to financeincreased 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 in1983 to 33 percent in 1989 (Ghana Statistical Service, Quarterly Digest of Statistics 7 (1), March1989, pp. 31-32). Most of this increase reportedly went to meet rising working capital requirementsof existing clients.

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include steel, paper products, and textiles and garments. New investment in the large-scale sector hasremained low: the public sector is trying to reduce iits holdings; existing firms still have unrepatriatedprofits; and new foreign investors remain wary. But some firms are investing to replace outmodedequipment, which is beginning to constrain their abilily to continue raising capacity utilization.

Table 3: Large-Scale Manufacturing Production and CapacityUtilization, 1977-88

1977 1983 1984 1987 1988

Index of manufacturingproduction (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 Dawsonof 672 small firms in Kumasi provides some information on the impact of the ERP and the potential ofSSEs (see Annex A for a fuller discussion). Most of the firms interviewed reported a decline in demandresulting 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 therecovery of production in larger firms or from imports. Small firms also had difficulty absorbing theincreased prices of both imported and domestic inputs, which rose as devaluation and price liberalizationraised the incentive to produce tradable goods. Competition among the smallest ("microenterprises") hasbeen intensified by the apprenticeship system, which provides surplus labor with the minimal skills necessaryto establish their own enterprises. Nevertheless, some small businesses have adapted successfully throughinnovative use of local materials to exploit particular market niches.

Dawson was more optimistic about the potential for growth among a new group of better educatedand trained entrepreneurs in small-sized firms. He identified a substantial core of entrepreneurs with thetechnical skills and ability to increase the sophistication of local production and the means to acquire moretechnologically advanced equipment. Even outside this core, he found that the technology base hadadvanced significantly in terms of more skilled, salaried workers and power-driven equipment (some of itmanufactured locally).

Dawson found that the number of microenterprises had grown rapidly--indeed, more rapidly thandemand for their services--financed mainly from personal and family sources. However, expansion of smallfirms with more dynamic potential was constrained by lack of access to adequate finance for their largerinvestment and working capital needs. He concluded that formal institutions generally were not welladapted 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 ofSSEs in Ghana and the impact of the ERP. A particuilar concern was to distinguish between the dynamicrole 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.

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One dynamic issue is whether changes in the institutional environment can facilitate developmentof a larger, more productive small-scale sector. The relative paucity of SSEs in Africa is sometimes seenas a 'missing middle" that must be developed as a basis for sustained growth of industrial production inlarger firms (Kilby, 1988). To be dynamic, SSEs need to be integrated into an institutional framework thatprovides information on opportunities and finance to take advantage of them. This institutional systemmust help firms achieve and maintain their competitive positions through specialization in production, bettermanagement systems, marketing, and application of productivity-raising technology and equipment. Thesecharacteristics tend to be associated with larger firms--in part because the formal institutional frameworkis designed for them.

The importance of small firms in providing income-earning opportunities outside formal wageemployment is reflected in the growing attention to microenterprises and the 'informal sector." Althoughnot susceptible to precise definition, these terms refer to activities that people undertake more forsubsistence than as a growth-oriented investment. Characterized by easy entry, these activities are a criticalsafety valve for employment of the rapidly-growing African population. From a social perspective, expansionof the sector may be more important than growth of individual firms. The issue for economic growth iswhether additional entrants of this type add to aggregate sectoral income, or simply take away from theincome of incumbents.

A survey was designed to investigate the characteristics of different-sized enterprises in the Ghanaiancontext and the differential effects of policies on them. Interviews lasting one to two hours were conductedwith 82 entrepreneurs in different subsectors, towns, and size categories. Microenterprises, defined in theGhanaian context as having fewer than 4 workers, were hypothesized to serve more as a safety valve forsurplus labor and to be less dynamic in the context of the ERP. Potentially dynamic entrepreneurs werethought more likely to be found in small-scale enterprises, defined as having 4 to 29 workers. Some largerfirms were also included in the sample for comparison. Characteristics of the sample are presented in thenext 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 whatextent 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 andsubsector?

* Is the environment conducive to sustained growth of industrial production and investment?

* What are the most important constraints on supply response, and do the appropriatemeasures 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 IVdiscusses entrepreneurs' views of the business environment.

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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 theGhanaian economy associated with the economic downturn of the early 1980s and theeconomic 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 therate of growth and labor absorption by SSEs.

The survey was conducted in four locations to represent a cross-section of urban/rural andgrowing/stable settings. Data from the questionnaires were analyzed for the sample as a whole and forsubsets according to firm size (micro, very small, small, and medium/large), date of start-up (pre-1984 and1984-1989), and six predominant subsectors (food processing, soap and cosmetics, metal products, textilesand garments, wood and wood products, and building materials excluding lumber).N In the absence ofresults from the 1989 census of small-scale enterprises, it was not possible to select a statisticallyrepresentative 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 industrialarea and one in Kumasi, a major city in the center of Ghana. The rest were outside the principalurban centers: 25 in Nsawam, a sleepy town an hour north of Accra; 10 in Oda, located in atimber-growing region; 7 in Mankessim, a small trading town in an agricultural area. The oldestfirm started in 1950 and the most recent in late 1989. Forty-eight firms (59 percent) were startedprior 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 monthlysales. The number of workers in sample firms ranged from 1 to 45. Following statistical divisionsused 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 inthe Industrial Statistics). SSEs are further sub-divided into 26 'very small" (4-9 workers) and 16small firms (10-29 workers; 10 being the criterion for inclusion in the Labor Statistics). Althoughthe latter category is sometimes called "medium-scale' in Ghana, this term is applied here to firmswith 30-99 workers for comparability to other countries. In terms of monthly sales, the samplecontains 39 firms with monthly sales of C100,000 (US$333) or less; 25 firms with sales betweenC100,000 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 fallinto 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 werein tie-dyeing and kente weaving, not cotton cloth manufacture or printing. Remaining activitiesinclude: goldsmithing, canework, pottery, footwvear, chalk, printing, upholstery, and drum-makingfor marching bands.

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Table 4: Distribution of Firms and Employment by Manufacturing Subsector

Source and Food Texiles, Soap and Building Wood MetalCategory processing garments cosmetics materials products products W Other Total

Number ofsample firms

Total 15 9 7 7 13 15 16 82Female owned 7 6 1 1 0 0 0 15

Employmentin sample

Total 175 111 117 81 85 113 180 862In femaleawned firms 33 98 2 7 0 0 0 140

Percentage distribution

No. of firmsSample 18.3 11.0 8.5 8.5 15.9 18.3 195 100.0Female owned 46.7 40.0 6.7 6.7 0.0 0.0 0.0 100.0Small (1963) b/ 36.9 33.0 n.a. na. 12.2 18.1 8.1 100.0Recorded (1987) JY 16.3 31.1 1.1 4.1 d/ 4.8 14.0 28.6 100.0

EmploymentSample total 20.3 12.9 13.6 9.4 9.9 13.1 20.9 100.0Women in sample 23.6 70.0 1.4 5.0 0.0 0.0 0.0 100.0Small (1963) h/ 36.9 33.0 n.a. na. 12.2 18.1 8.1 100.01984 Census e/

Large-scale U 20.9 19.1 5.8 4.6 25.2 5.3 19.1 100.0Small 43.5 23.8 3.9 3.5 8.7 3.3 13.2 100.0Total 41.3 23.4 4.1 3.6 10.3 35 13.7 100.0Women 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 havehad 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

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percent of the sample has participated in any type of government training program. When asked how theylearned to run their businesses, 40 percent said through apprenticeships, followed by "from parents andrelatives' (22 percent) and 'by trial and errore (21 percent).

Education

Reflecting increased education among Ghanaians, owners of more recently established firms of allsizes have completed more years of school than have the owners of older firms. The number of newer smallfirm owners who have finished middle school is twice that of pre-1984 owners (60 percent versus 29percent). Owners of more recently established microenterprises also are better educated: 75 percent of thepost-1983 sample have completed middle school versus 29 percent of pre-1984 owners, and 44 percent haveparticipated in apprenticeship programs versus 25 percent of owners who started up before 1984. Theincreasing proportion of educated entrepreneurs suggests that choosing to work in business is receivinggreater social acceptance. Relatively high education levels among microentrepreneurs also reflects asubstantial 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 andmore traditional industries in Ghana, i.e., metal and wood products and textiles and garments, rely moreon apprenticeships than on formal education to provide them with the skills they need. In addition, 40percent of people producing wood products, 33 percent of metal workers, and 11 percent of textile andgarment producers have progressed beyond secondary school. In contrast, owners of firms producing soapand cosmetics and building materials seldom have trained as apprentices but have progressed further inschool. About 84 percent of those producing building materials and 67 percent of entrepreneurs producingsoap 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 generationof entrepreneurs is emerging, partially in response to an environment that offers greater freedom andopportunities for private business and fewer prospects for civil service than previously. Many firm ownersinterviewed are highly entrepreneurial in that they have departed from the paths of their parents, are ableto perceive opportunities, and are willing to take risks. In response to the question "Why did you go intobusiness?," 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 jobopportunities 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 theyhave been trained to do so (43 percent vs. 13 percent of pre-1984 owners). None of the parents of thepost-1983 entrepreneurs in middle-sized firms was in business versus 38 percent of pre-1984 owners. Asdiscussed in the next section, this group of recently established small firms appears to be the most dynamicof all groups surveyed.

A continuum of entrepreneurs can be envisioned, with those at one end driven mainly by the supplyof labor and those at the other driven mainly by consumer demand for their products. The former generallyare seeking income for survival and are artisanal in nature, e.g., metal products and repair, furniture, tieand dye fabrics, made-to-order garments, simple food processing, and crude soap-making. They tend to relyon apprenticeships for their training with relatively few years of formal schooling and, to a great extent, theyfollow 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 continuedproduction much as in times past.

Many microenterprises, both new and old, fit into this first group. Production in most has declinedor stagnated since 1983 (Table 5). There is evidence thiat this group has grown in numbers in Ghana asmore people have sought self-employment in response to falling real incomes and scarce opportunities.

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Incomes have recovered somewhat since 1983 but have not yet reached former levels or stimulated a surgein 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 piecesin an enlarged microenterprise sector. Survey data indicate that new microentrepreneurs have made greateruse of apprenticeships than older ones, perhaps partially in response to the fears of low-income parents fortheir childrens' futures. If, in fact, the markets for many traditional microenterprise products are saturatedand the size of the pie does not expand more rapidly, the slices will become even smaller and years spentin apprenticeship programs will not be particularly productive. Prospects will only improve when the growthof 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 thedecline in demand for garments by offering apprenticeships to young girls in town. She has 37 apprenticeswho learn on sewing machines leased by their parents. There are no orders for garments and no fabric tobe seen; the girls learn to sew on paper bags. The seamstress has solved her immediate need for incomebut may have ensured tougher times for herself in the future by training her competition. The girls' futuresprobably will depend more on the overall growth of income among Ghana's poor and working clasi thanon their abilities as seamstresses.

At the other end of the continuum are firm owners who are highly entrepreneurial. Some arehighly educated, and a number have left large companies to start their own businesses. Presumably, theyhave chosen this route because opportunities are scarce elsewhere, confidence in the stability of thegovernment and the economy has grown to the point where they are willing to risk their resources, and theyare stimulated by the challenge of working on their own. Their goals go beyond basic income generationto the building of enterprises and the accumulation of profits. They are better educated, both formally andthrough significant past job experience, and far more dynamic in the sense that they demonstrate a keenability to recognize opportunities in the rapidly changing Ghanaian economy and a willingness to act ontheir perceptions. Most started small but moved up, some more quickly than others. They have foundprofitable 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, orundertake innovative processing of local materials.

Many of these highly dynamic entrepreneurs have built their enterprises in direct response to thenew business environment in Ghana. Within each size category, new firms established since 1983 have hada greater tendency to grow (Table 5). As imports were liberalized, new firms sprang up to supply low-costsubstitutes. 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. Withdevaluation of the cedi, prices of imported inputs rose and many of the more dynamic entrepreneurs sought

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ways to make greater use of local raw materials. Successful examples include the use of crushed oystershells 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 scrapmetal to make trunks, water coolers and commercial Ireezers. Devaluation has also resulted in a rise inthe price of exports generally, and of timber specifical]ly. New, small sawmills are buying logs from thosewith timber concessions and sawing them into lumber which they then sell to larger exporting firms. Oneenterprising individual collects mountains of sawdust from the large sawmills and compresses it intobriquettes 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 Femalecategory a/ owned owned Total owned owned owned owned

Microenterprises 26 7 33 38.8 46.7 6.7 17.3Very small 20 6 26, 29.9 40.0 8.9 6.3Small 16 0 16 23.9 0.0 143 n.aMedium/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 processingand textiles and garments, as they are in the economy as a whole (Table 4), and they tend to be foundmostly in micro and very small enterprises (Table 6).-' The problems women face in business in Ghanaarise more in relation to their very small size in these easy-entry activities than from gender-related issueswithin 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 only6.8 years of education (as against 10.9). Curiously, however, women in microenterprises have a relativelyhigh level of education compared to their male counterparts (43 percent with 12 or more years of schoolingas against 28 percent) and to women in larger enterprises (13 percent). Furthermore, the average age offemale-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 viewsuccessful self-employment as a satisfactory, permanent source of income rather than as a step towardexpansion. Another is that women are limited in their abilities to expand their enterprises by othersubstantial demands on their time.

Whereas the educational level of recent male entrants is higher than that of those who startedbefore 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, andthe principal activity was as much training as manufacturing. None of the firms in the separatesurvey of large-scale firms was female-owned.

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percent). This suggests that women may be going into business more for lack of viable alternatives, whereasnew male entrepreneurs are more likely to be applying their skills to exploit new opportunities. Theaverage age of male-owned firms increases steadily with size, suggesting that those who stay in business tendto grow.

Women are much more likely to employ other women than are men. Excluding the entrepreneursthemselves, 47 percent of workers in female-owned establishments are women, as against only 22 percentin male-owned establishments. The overall share of women in employment in the sample (28 percent) isless 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 greatmajority 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 soleproprietorships; 10 percent are partnerships; 5 percent are corporations; and 11 percent are organized inother forms. Only 12 percent of sample firms are not registered with any national or local governmentorganization, and just 15 percent reported that they do not pay taxes. Even among microenterpnses, 69percent 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 bankloan. The overwhelming source of finance for smaller firms is personal savings supplemented by funds fromfamily and friends. Informal sources of credit played no discernible role.

The use of public services--electricity, water and telephones--is surprisingly low. Twenty-five percentof 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 percentof earlier firms. None of the newer microenterprises uses electricity. The newer microenterprises evidentlyare operating on a more ad hoc basis, with margins that are too small to afford utility bills and withtechnologies 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 rawmaterials. On the average, the proportion of imported raw materials used by microenterprises arnd verysmall firms (20 percent) is about half that used by larger ones (Table 7). This differential is a result mainlyof differences within two subsectors (metal products and soap and cosmetics) and the concentraition ofsmaller firms in subsectors with low import content. In the other four subsectors, the import share in thelarger 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. SeeWilliam F. Steel, "Female and Small-Scale Employment under Modernization in Ghana," EconomicDevelopment and Cultural Change, 30, 1 (October 1981), p. 164.

2/ Although many of these firms appear 'informal" in the organization of their production process, theterm cannot readily be applied in the sense of operating outside the legal system. Many gradationsof "formality" in different aspects of business operation were observed. Hence we have avoidled theterm "informal sector" and instead used size categories that can be objectively (if arbiitrarily)measured.

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share (10 percent) and soap and cosmetics has the highlest (55 percent). Firms established since 1984 tendto 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 SoapFood and Wood and Building Metal All

Size category processing garments products cosmetics materials products subsectors

Micro & very small 20 28 10 47 19 10 20Small, 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-sevenpercent of the firms sampled reported that they buy regularly from large firms. The proportion variesmore by subsector than by size. Nearly half of soap and cosmetics and building materials firms purchaseraw materials from large firms, whereas wood and metal workers rarely buy from large firms. Directlinkages 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 aproducer of starch for textile manufacturers.

Markets

A high level of interaction takes place across firm sizes in marketing finished goods. Except formicroenterprises, which generally retail their own products, a large percentage of firms sell to otherbusinesses. Examples include small sawmills selling lumber to large mills to help them meet orders andproducers of finished garments selling to large retail department stores. Some shifts in markets are evidentin the fact that newer small-scale firms sell far less to rural people (14 percent versus 38 percent) and farmore to other businesses than the pre-1984 firms (57 percent versus 11 percent). As successful small- andmedium-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 surroundingtowns; 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 sellfirst to other businesses and second to rural people/farmers; microenterprises sell equally to rural and urbanlow-income people.

Subsector analysis shows that almost half of soap and cosmetics producers sell to rural, low incomecustomers. Interviews confirmed that some producers in this subsector have dealt successfully with growingimport competition by producing cheap substitutes--soaps and hair creams--for low-income people. Woodproducts consist mostly of furniture for medium and low income people--again, a cheap substitute forimported, higher quality furniture. Textiles and garments are an exception in that they sell fairly equallyacross 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 largefirms and was conducted during the same mission) is included, the use of imported raw materialsdrops from 39 percent among pre-1984 firms io 24 percent for post-1983 firms.

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implements to rural people and those that have broken into new markets, particularly those associated withthe construction industry.

Capacity Utilization

Eighty-six percent of the firms surveyed were operating at 50 percent or less of capacity, with anaverage of 36 percent. 1y Slightly higher rates are found among the newer small firms (42 percent), andslightly lower rates in the medium/large firms and in the more recently established microenterprises (27and 32 percent, respectively). Variations are much greater within than between subsectors:

* Among food processing firms, fish-smokers and bakers have the lowest capacity utilizationrates; firms that produce fruit juices have the highest

* Seamstresses who make women's clothing are working at very low levels because of easyentry into the subsector and competition from imported used clothing.

* Those who build furniture for low-income consumers are working far below capacity, mainlybecause people in their markets cannot afford to buy furniture.

* Small sawmillers could sell more but cannot obtain enough logs from those with timberconcessions.

* Producers of disinfectants and some varieties of soaps are operating at a fraction of theircapacity, 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 survivingonly because of their repair services, due both to competition from imports and to lack ofdemand among rural consumers. Those metal workers who have developed new productsfor the construction industry or well-adapted agricultural machinery could sell more but arekept 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 andthen to list up to three others. Lack of credit for raw materials is the single most serious problem citedby 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), toomany other firms in the same business (6 percent), and lack of local raw materials (6 percent). Lack ofcredit is the largest problem for small firms, whereas microenterprises see lack of demand as a moreimportant problem than lack of credit. Medium/large firms cite the high price of imported raw materialsas their biggest problem. Although they are more able to get credit to cope with this problem, they areless 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 bysubsector. Lack of credit is the most commonly cited single problem by all firm sizes except formicroenterprises, 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 couldsell everything they produced. Low rates are to be expected among microenterprises, in which lowentry barriers lead easily to market saturation.

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is seen in the relatively low percentages that mention demand-related problems and their relatively highconcern 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 enoughmoney 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 than7 percent of ftrms are not shown.

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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 lowto generate sufficient working capital to keep up with rising grey-cloth prices. Prices of finishecd goodscannot 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 agriculturalimplements), demand is less of a problem than is finance for working capital for raw materials andinvestment capital for new equipment.

Interpretation of these findings is not straightforward. Some of the firms that cited lack of financeas their principal problem also stated that they would not take a loan because they would have difficultyin selling enough to pay it back, or that if sales increased they would not need credit. The relativeimportance of weak demand and large number of competitors for microenterprises indicates that this sectoris saturated as a result of labor supply pressures. Although credit and supply-side assistance may helpindividual microentrepreneurs, they will have little effect in raising sectoral incomes unless demand iises forthe products of microenterprises. Demand problems cited by large firms generally stem from liberalizedimport 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 canbecome more efficient, and credit for restructuring to lower costs could be quite productive. The area inwhich 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 readyto expand.

Table 10 presents the problems cited in a similar study conducted in 1973. The most strikingdifference is that access to raw materials was the most critical constraint in 1973, especially for small- andmedium-sized firms, which required imported inputs but had difficulty obtaining them through the importlicensing system. Shortage of raw materials is a particularly important constraint on the building materialsand metal products industries, which in 1989 were among the most seriously affected by inadequate creditfor raw materials. The textile industry clearly benefited from its high priority in the rationing of foreignexchange in 1973. Raw materials were a relatively unimportant concern for the textile and clothing industryin 1973, whereas the inability to buy raw materials was more serious for this subsector than any other inthe more market-determined environment of 1989.

Demand was a frequently mentioned problem in both periods, especially for microenterprises. In1973 9 percent of microenterprises saw the low level of demand and 42 percent saw lack of clients as amajor problem; in 1989, 55 percent cited demand and 21 percent too much competition. Themicroenterprise sector evidently was overcrowded even in 1973. In both periods, lack of demand was anespecially important constraint on the textiles and clothing subsector (which is comprised mainly ofmicroenterprises). Unlike 1989, credit was not seen as a significant problem in 1973, except in woodproducts and textiles and clothing.

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Tal 9: Major Problems in Current Operations by Subsector(percentage of respondents in each category)

Constraints on Textiles and Soap and Building Wood andcurrent operations a/ Total sample b Food processing garments cosmetics materials wood products Metal products

CreditCan't get credit to buy raw materials 57 27 89 29 57 39 60Can't get credit to buy equipment 29 60 11 0 14 46 40

DemandPeople 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. availabilityPrice 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

EquipmentEquipment is old and needs replacing 23 27 22 14 0 8 47

InfrastructureInterruption of electricity 7 7 0 0 43 8 7

Other infrastructure problems 7 0 0 14 0 23 7

Business environmentTaxes 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. MetalProblems Micro small Small Total proc. garments products mthi products Other

PRIMARY PROBLEMInputs:

Raw materials 37 83 64 42 24 15 52 100 78 83Spare parts 11 0 0 9 28 6 9 0 22 3

DemandNot enough clients 29 8 7 26 40 46 9 0 0 0Level of demand 6 0 21 7 8 6 9 0 0 9

Labor 0 8 0 1 0 1 0 0 0 0Credit, working capital 14 0 7 12 0 18 21 0 0 6Other 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 109Spare parts 21 0 0 18 48 15 15 0 33 3

DemandNot enough clients 42 8 7 37 68 62 15 0 0 3Level of demand 9 25 43 13 8 8 15 33 22 17

Labor 1 17 0 2 0 3 3 0 0 0Credit, working capital 21 8 14 20 0 27 36 0 0 11Other 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).

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III. INDUSTRIAL ADJUSTMENT BY SIZE CATEGORYAND 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 andprofits. Some import-competing firms have had difficulty competing with liberalized imports, while othershave benefited from the rising price of competing imports and increased access to imported inputs. Somefirms see weak demand and increased competition as constraints on their ability to expand, while othershave responded to improved export opportunities and new domestic market niches. Although both positiveand negative effects are found within each size and subsector group, the differences between group averagessuggest that structural changes are occurring.

There is evidence both of growing dynamism at the firm level and of constraints on the realizationof 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 drivenby excess supply of labor rather than production-generated demand. Despite import liberalization, domesticsmall 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 thiscompetition, 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 creditand the absence of mechanisms to shift resources from declining firms to those with greater growth potentialhave 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 theycan expand capacity utilization. Weak demand is a consequence of external factors and policy distortionsthat contributed to the sharp fall in income per capita in the decade prior to the Economic RecoveryProgram (ERP) and of restraints on demand under the E_RP. Certain large-scale industries such as textileshave been especially affected by decreased income and a shift toward lower-cost substitutes (e.g., usedclothing). Stronger recovery of demand is a prerequisite for continued growth and renewed investment inmany areas. As demand and credit problems are resolved, taxation and the business climate may becomeincreasingly important as constraints on investment, at least for larger firms; smaller firms tend not to bevery 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 formanufactured goods, and the scarcity of imported inputs curtailed industrial activity generally. The neteffect of these changes on the size and structure of industry generally, and on SSEs in particular, is anempirical question that is difficult to assess for lack of comparable data over time. An indication of howsmall industry has changed since the early 1970s can be obtained by comparing data collected in this surveyto 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 andlarge factories and dampens the prospects for dynamic growth. It has few large firms apart from foodprocessing. As a market center, it suffered from the neglect of agriculture until the late 1980s, when fruitsfor processing and export have done well. On the whole, it probably suffered less during economic declineand 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 (%) (%) (%)

ManufacturingTetiles, garments -73 443 35.7Wood products 13.0 93 9.2Milling (corn, flour) 50.0 81 10.6Jewelry -50.0 81 3.5Bread 60.0 6.1 8.5Kente 40.0 0.8 1.1Food processing 300.0 2.0 1.8Metal products 0.0 2.0 1.8Footwear 25.0 1.6 1.8Other 133.3 1.2 2.5Subtotal, manuf. 6.3 83.7 77.4

Informal at -30.0 29.1 19.2Permanent structure 21.2 70.9 80.8

RepairsVehicle 43.8 6.5 8.1Electrical 133.3 2.4 4.9Tools -12.5 3.3 2.5Shoe 175.0 1.6 3.9Other 50.0 2.4 3.2Subtotal, repairs 60.0 16.3 22.6

Total manuf. & repairs 15.0 100.0 100.0Informal a( -19.7 24.8 173Permanent structure 26.5 75.2 82.7

Growth in Nsawam's 29.5 - -

total population

Number of firms:Total - 246 283Per 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 1989is attributable in large part to a shift of seamstresses and tailors from stalls inside the market to their ownkiosks 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).

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During the period 1973 to 1989, the number of manufacturing and repair firms in Nsawam grewby only half as much (15 percent) as population (30 percent; Table 11). Most of the net growth occurredin repairs--a reflection of people's inability to afford or to find replacements for their shoes, appliances, andvehicles. 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 absorptionmay 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 smallfirms in Nsawam. The number of manufacturing firms fell from 7.7 to 6.3 per 1000 persons.U Kenteweaving and goldsmithing suffered absolute declines. Although these are traditional artisanal crafts, theydepend completely on imported dyed yarns and refined gold and they can be considered luxury productsfor which cheaper substitutes are readily available. The number of garment makers (mainly self-employedseamstresses and tailors) also declined, although this remains the dominant small-scale manufacturingactivity. 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 in1973 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-scalemanufacturing and repair sector since 1973. On balance, negative forces (especially lower income per capitaand 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 townswhere 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 areillustrated in Table 12, which shows the average annual growth in total employment during 1975-83 and1983-89 for sample firms established by 1975.0 During 1975-83, incomes fell and import controls weretightened as foreign exchange became increasingly scarce. Nevertheless, employment grew at 7.6 percenta year in the medium- and large-scale firms in the sample, presumably because imports were channeled tothese firms and because the government maintained strong pressure on both public and private sector firmsnot to lay off workers. Microenterprises and SSEs, however, lacked government protection and sufferedstagnant 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 withcity size, although the number of small firms in manufacturing was lower relative to population inAccra than Nsawam. It is unlikely that this decline in number of manufacturing firms per capitais 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 restof 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 toclassify firms as medium/large (30 or more), small (10-29), very small (4-9), and micro (1-3). SeeAnnex B for additional details.

14/ These data are at the individual firm level. It is likely that total production and employment werefalling in the large-scale sector as some firms shut down. Conversely, aggregate employment inmicroenterprises and SMEs may have increased, as people sought alternative and supplementarysources of income.

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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 7.6Very small 7 -0.2 6.2 1.3 45.1SmaU 9 0.5 3.1 8.1 19.1MediumAarge 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. Forfirms established from 1984 to 1988, size categories are based on 1989 employment and weights onemployment at start-up.

The picture reversed sharply under the ERP from 1983 to 1989. Employment fell rapidly in themedium- and large-scale sample firms, partly because many were able to shed excess labor and partlybecause they were squeezed between high costs of imported inputs and greater competition from liberalizedimports. Employment rose in allU the other size categories. The issue is whether increased employment perfirm was attributable to expansion as smaller firms gained greater access to inputs and agriiculturalproduction and incomes recovered, or to increased labor absorption as real wages fell and formal sectoremployment diminished.ly

Impact of Adjustment on Production and Employment

By introducing greater competitive forces and opening up export opportunities, adjustment policiesare intended to yield a more efficient, dynamic structure of production by forcing inefficient firms 10 lowerproduction 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 substantialnegative impact could be expected early in the ERP. An overall dampening "income effect" on demand formanufactures could also be anticipated from stabilization policies.

The negative effects would be mitigated to the extent that local resource-based and export industriesexist and could take advantage of the incentives provided by a devalued exchange rate. These industries arefavored 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 theircontinued growth over time will depend on the ability of the financial system to shift resources to themfrom industries that are declining.

D51 The exceptionally large increase of 16 percent a year for microenterprises may be soimewhatexaggerated because the base is very small and may include some larger firms that were temporarilyoperating with fewer than four workers in 1983. Also, the 1983 data may not always have includedthe owner in total employment, whereas the 1989 figure did. The data for firms established between1976 and 1983 show a similar increase in employment during 1983-89 for microenterprises. Onlyone large-scale firm in the sample was established in this period; it shows an increase because itwas only at the start-up level in 1983 and was based on local inputs. Contrary to the small-scalefirms established by 1975, those established during 1976-43 show a slight employment decline,despite their relatively low import content.

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Table 13 presents survey results on the impact of adjustment on production and employment, bysize group according to the number of full-time wage employees in 19890 For the entire sample (firstcolumn), approximately the same proportion of firms increased production (39 percent) from 1983 to 1989as decreased (43 percent). When broken down by size and period of establishment, however, declines inproduction predominated among microenterprises and SSEs established by 1983,71 whereas increases inproduction 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 inexpanding output in all size groups than those already in existence. This suggests that new firms--especiallySSEs--have entered relatively high-growth activities.f

Significant differences in impact are apparent beiween subsectors (Table 14). Wood products hadthe highest proportion of firms showing an increase in both production and employment. This sectorbenefited because devaluation protected its high domestic value added component and enabled some firmsto resume exporting, while its imported share of inputs (10 percent) is the lowest of any subsector. Morethan half the firms in food processing, textiles, and wood products had an increase in production in theseparate survey of the large scale sector as well as in the SME survey. Building materials and metalproducts 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 ofimported inputs (40 percent said that imported inputs vvere more difficult to get, greater than any othersubsector, and good domestic scrap was also reported to be increasingly scarce) and competition fromimports (21 percent cited imports as providing major competition).

Building materials had a relatively high proportion (58 percent) of firms constrained by weakdemand, and its respondents complained much more lthan those in other subsectors that governmentregulations had become harder to deal with (67 percent; Table 12). Demand problems may also explainwhy food products and textiles and garments had nearly as high a proportion of firms with decreased asincreased production. A third of these firms said they could not even sell current production, and 33percent of food processors and 44 percent of textile and garment producers cited demand as their mostimportant 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 since1983 may have moved to a larger group while those that contracted may have moved down. Inparticular this microenterprise category tends to be biased toward firms that were less successfulunder 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 studyand a complementary (and more representative) survey of large firms suggests that fewer existinglarge firms were adversely affected by adjustment policies than smaller ones. Of the large firms inthe SSE survey, the same proportion (43 percent) reported an increase and a decrease inproduction, while twice as many large firms in a separate survey reported an increase as showed adecrease.

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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 LargeAll firms scale

Impact surveyed Micro V. small Small Med/large Micro V. small Small MedJlarge survey

AllFirms established by 1983 Firms established after 1983 Years

Change in production:Increase 39 29 31 33 43 34 70 43 n.a. 58Decrease 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. 35Decrease 16 18 25 11 29 6 0 29 na. 39

New firms as percent ofall 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 BYSIZE 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 Metalor start-up surveyed[al products garments products cosmetiks materials products

Change in production:Increase 39 53 55 62 43 14 14Decrease 43 40 44 23 29 72 58

Change in employment:Increase 62 44 71 86 25 67 71Decrease 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 18Change since 1983:

Greater 11 29 0 0 17 0 0Smaller 17 14 0 0 17 50 0

Easier to get:Imported inputs 68 75 100 75 67 75 40Domestic inputs 56 67 86 45 33 100 43

Harder to get or too costlyImported inputs 16 8 0 25 0 0 40Domestic inputs 21 13 14 45 0 0 14

Credit harder to get 84 63 75 100 80 100 100

Dealing with governmentregulations is:

Easier 39 44 50 14 0 33 50Harder 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 21Small firms 77 71 89 100 57 84 57

Have exported(direct or indirect) 9 21 11 8 14 0 7Have considered exporting 38 21 56 54 43 29 27

Constraint on sales:Resources (could sell more) 52 60 33 42 86 43 64Demand: 48 40 66 58 14 58 35

Can sell current productionbut no more 24 7 33 25 14 29 21

Can't sell currentproduction 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 haveoccurred in the absence of adjustment policies, they suggest that the ERP has enabled many lirms torecover from the declining output that characterized the preceding years, while others have suffered. Therecovery 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 uniformacross the board. The differential impact both within and between subsectors suggests that only some firmsbenefited, while others were squeezed, as expected.

One striking feature of the recovery is that a much higher proportion of firms reported an increasein employment (62 percent) than in production (39 percent). This was true for all size groups and foursubsectors (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 ofexcess labor, so that employment need not have risen in order to utilize existing capacity more fully. Theexplanation may be partly substitution--real wages have eroded drastically while interest rates rose, makinglabor relatively cheap--and partly excess supply--labor has increasingly had to seek income-earningopportunities outside the public sector, which has laid off substantial numbers of workers. The relativelyhigh 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 percentfor all firms surveyed). Only among the large-scale sample from a separate survey did a larger share offirms report production than employment increases, perhaps reflecting their need to become morecompetitive by raising productivity. '

Investment Response

Contrary to some observers' perceptions, investment Is taking place, at least among SSEs. Nearlyhalf 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 wereestablished since 1983 (high birth and death rates are expected in this group); 38 percent and 44 percentof 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 early1980s, 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 byaltering their product lines. The product mix was changed significantly during the ERP by 34 peircent ofthe firms surveyed (Table 15). As the construction industry picked up, metal workers began producing metalgates and burglar alarm systems. Having lost his contract to produce chalk for the Ministry of Educationto Chinese producers, one entrepreneur shifted into production of starch for the textile industry. Changesin product mix were made by the largest number of firms in the soap and cosmetics and the textiles andgarments subsectors (83 percent and 50 percent of firms, respectively, Table 14). The food, wood, and metalproducts 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 lessvulnerable 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 4 5 S/

Selling in differentmarkets 15 12 19 0 43

Imported share of raw materials:Actual % share 34.0 J 19.1 19.1 62.8 52.6 CChange since 1983:

Greater 9 Y 11 11 25 8RSSmaller 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 YDomestic 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. Ofthe 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 9percent have had any direct or even indirect experience with exports (Table 16). Those who export do soon 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, importliberalization makes imports easier to obtain and wideni access to them beyond the large-scale firms thatwere favored by the import licensing system. This recovery effect should enable firms generally to increasetheir utilization of existing capacity. Second, devaluation has greatly raised the cost of imported inputs, andthe prepayment requirement of the auction has restricted access to those firms with sufficient liquidity orcredit. This substitution effect should encourage firms to shift toward local inputs over time and favor newinvestment in industries with high proportions of domestic inputs and value added.

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Figure 3

SHARE OF FIRMS WITH CHANGE IN IMPORT CONTENT BYSIZE 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 IMPORTI | 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 percentreduced it (Table 15).A° On the one hand, this result suggests substantial substitution to reduce import.intensity. This effect was strongest among medium- and large-scale firms, with 83 percent substitutingdomestic for imported inputs (Figure 3). On the other hand, the fact that 72 percent of all firms did notreduce import content indicates that the responsiveness may be much less than expected, at least for existingfirms. Many firms must purchase or modify machinery in order to make greater use of domestic materials,,and relatively few have been able to finance such investment. None of the firms in wood, metal products,and textiles and garments reported any change in import content (partly because import shares were alreadyrelatively low--although 50 percent of firms in building materials substituted some domestic for imported,materials, despite a low average import content). Recorded statistics for large-scale industry as a wholeshow no significant change in average import content from 1984 to 1988.

Another possible reason for the limited substitution within firms is that relative prices may not havechanged much in favor of domestic materials, most of which are tradable. The high price of local rawmaterials is cited as a problem by a larger share of firms (22 percent) than for imported inputs (13 percent;Table 9). The price of agricultural raw materials has risen because food prices have been liberalized; therelative change over time depends on the agricultural supply response. The price of cloth to t]he tie-dye

Z/ The increase in import content of food processing was attributable to feed meal--presumably usingmore imported supplements--and bread, because some flour is now being imported directly.

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and garment subsector remains high because extra tariff protection is provided to large textile mills and costsin the greycloth factory have not been significantly reduced. The additional tariff on textiles was reducedfrom 40 percent to 10 percent in 1990. Since timber is exportable, its domestic price can be expected torise pan passu with devaluation. Good scrap metal is increasingly scarce. Thus there may be supply-sideconstraints to rapid expansion of some subsectors that are based on local raw materials.

Sources of Competition

The fact that some firms have suffered declining production under the ERP has created protectionistpressures on the Government. The evidence from the survey indicates that import competition is a problemmainly for certain products and large-scale firms, not a general concern. Although 61 percent of the firmsinterviewed claimed that competition had increased since 1983, only 21 percent mentioned imports as amajor source of that competition, and only 12 percent if large-scale firms are excluded.W/ The principalsubsectors affected by imports are metal products (21 percent of firms, mostly in agricultural machinery,which can be imported duty-free) and soap and cosmetiics (29 percent of the subsector, especially ofcosmetics firms that do little more than repackage imported materials; Table 14). Of 31 large-scale firmsinterviewed in two surveys, 50 percent said that imports are a main source of competition.A' But for firmsunder 30 employees, other SSEs are the primary source of competition for about three-quarters of the firms.Thus, pressure from imports can be seen as a selective measure to help redress the past bias toward highly-protected large-scale investments.

Constraints on Adjustment

The ability of the more efficient enterprises to continue growing and complete the process ofindustrial adjustment now depends heavily on expansion of consumer demand. Demand problems areespecially severe for microenterprises: 38 percent cannot sell their current production, and another 19percent would be unable to sell increased production (Table 14). Employment in microenterprises willcontinue to grow because barriers to entry are low and labor is in surplus, so that income and productivitymay decline further without increased demand for this already overcrowded, low-wage sector. Policies thatput more money into the hands of the low-income population (e.g., through improving the terms of tradefor farmers) are likely to be more effective in the long run than supply-side measures to assist individualsto establish or expand microenterprises.

There was overwhelming agreement that credit has become tighter during the adjustment period.Only microenterprises, which typically make little use of credit, had less than 100 percent agreement thatcredit had become harder to get (Table 15). The lack of sufficient credit for raw materials and equipmentwas consistently cited as a major problem for current operation of existing businesses as well as investmentin new ones. Nearly half of all firms surveyed (especially the larger firms) have tried to get loans withinthe last five years (Table 16). Only 9 percent of firms indicated they would refuse a loan for working capitalat 30 percent interest, and 25 percent (mainly microenlerprises) would decline credit for investmentpurposes. Easing the credit crunch will be crucial for continued recovery and adjustment of the industrialsector.

Ll/ Tables 14 and 15. Firms were asked to indicate one or two main sources of competition fromamong: small firms; large firms; imports; other.

2y Forty-three percent saw domestic large-scale firms as major competitors, and 27 percent domesticsmall-scale firms. More than one major source of competition could be named.

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Table 16: Adjustment Responses and Constmaints by Fum Size(percentage of respondents in each category)

Size categories: WAll firms

Question surveyed Micro Very small Small Medlarg

Major competition from:imports 21 E 13 8 7 SoySmal firms 65 _ 75 72 72 37

Bank loan:Have ever had one 32 18 19 60 86Have tried to get one

in last S years 47 28 48 73 71.

Have exported 9 6 8 7 14(directly or indirectly)

Have considered 38 28 46 44 43exporting

Constraint on sales:Resources (could sell

more) 52 44 58 64 43Demand:

Can sell current productionbut no more 24 19 23 21 57

Can't sell currentproduction 24 38 19 14 0

(Number of firms) (82) (33) (26) (16) (7)

a/ See note a to Table 13.

_/ Includes an additional 24 firms from a separate survey of large-scale enterpries

Constraints on Future Growth

Although some firms have found market niches with good growth potential, many have not beenable to pass on fully the increased costs of raw materials and equipment to consumers in the form of higherprices, because of weak demand and an inflow of competing imports. Most firms have experienced afinancial squeeze, including those on sound financial footing in the past. The survey confirmed that, ifproduct demand is set aside, finance is the binding constraint on future growth. In sum, the incentive sideof the adjustment process is working--less efficient firms are being squeezed--but the financial side is notfunctioning adequately to enable more efficient ones to grow.

Firms were asked to describe the three most serious obstacles they would face should they decideto expand their businesses, under the assumption that they could sell all they produce. The majority offirms cited the unavailability of credit for raw materials and equipment as the binding constraint onexpansion, apart from demand (Tables 17 and 18). In many cases the financial difficulties stem from theincreased cost of raw materials and working capital In some cases, weak liquidity reflects reduced profitsin a more competitive situation, and the underlying problem may be inefficiency rather than lack of credit.

In interviews, many firm owners reported that they cope with lack of working capital mostly bypurchasing raw materials only in very small amounts because they cannot afford to purchase in bulk.Examples are agricultural implement producers who can buy only enough scrap metal to make one cassava

- 33 -

grinder at a time. Only when one sells can they buy materials for another.5 The same holds true forwood and cane furniture workers who display one or two models and cannot make more until one sells.Many of those interviewed expressed frustration with the inefficiency and insecurity of their situations.

Firms described their financial difficulties somewhat differently according to their size. The highprice of raw materials was cited more often by smaller flims, and lack of credit was emphasized more bylarger firms. Many microentrepreneurs are trapped between the rising costs of raw materials that are cuttinginto profit margins and the soft demand that has decreased their sales. When asked whether they wouldaccept a loan from a bank at prevailing interest rates, most microenterprises demurred because they doubtedthat they could sell enough to repay their loans. Less constrained by weak demand, SSEs were quick toidentify lack of credit for raw materials and equipment as major constraints to expansion and expressedstrong interest in loans at current interest rates. Many of these firms have customers for their products butinsufficient working capital, due in part to slim profit margins and delays in collecting from customers.Prices of raw materials were of concern but clearly secondary to the need for credit.

Table 17: Major Constraints on Future Expansion by Firm Size(percentage of respondents hi each category)

Constraints to Total Very Medium,expansion A( sample (Rank) Micro small Small large

Can't get credit for raw materials 56 (1) 52 64 54 60

Can't get credit for equipment 44 (2) 38 40 62 50

Local raw materials are too expensive 36 (3) 41 36 31 17

Imported inputs are too expensive 29 (4) 41 20 15 33

Equipment is old and needs replacing 19 (5) 7 24 39 17

Taxes 12 (6) 14 4 31 0

Method of production is out of date 8 (7) 14 8 0 0

(Number of firms) (82) (33) (26) (16) (7)

a/ Firms were asked to describe constraints to future expansion on the assumption that demand for their product was unlimited.They could list up to four constraints; hence the percentage can add up to more than 100 percent. Problems listed by less than8 percent of firms are not listed.

Subsector analysis brings out varying and specific needs (Table 18). The most binding constraintfor those who process foods, produce textiles and garments, and manufacture certain building materials islack of finance for raw materials: prices are high and credit is unavailable. From the discussion of firms'problems in Section I, it is clear that the impact of higher input costs in these three subsectors iscompounded by decreased revenues caused by weak demand and competition from other firms. Bakers

DJ One indication of slim operating margins is the connmon system of paying workers a bare minimumof salary on a regular basis and giving them a bornus when a product sells.

- 34 -

and fishsmokers are paying higher prices for flour and fish; tie and dye producers complain of increasedprices for local greycloth; and the high price of cement is a problem for local block makers.!/

In many ways, the soap and cosmetics subsector illustrates how the adjustment process actually takesplace. Soap and cosmetics producers can be divided into two groups: those who survived the surge ofimports by finding profitable niches, producing goods that are either higher in quality or much cheaper thansimilar imported products; and those somewhat larger firms that make liquid soaps and disinfectants whoseproducts both compete directly with imports and rely heavily on imported inputs. Many microenterprisesoap-makers reportedly have gone out of business since 1983 because poor product quality made themuncompetitive. The more technically competent small producers, however, have adjusted their product tothe new market situation and show continued increases in production in recent years despite the recoveryof Lever Brothers, the dominant producer. Lack of finance for raw materials is the chief obstacle to theirgrowth. Many larger firms in the second group described above are still in operation but find it difficultto alter their product mix or cut costs to compete with imports. They cite lack of credit for raw materialsas the primary obstacle, but their poor prospects may not justify further injections of capitaL The 43percent of firms in this subsector that saw lack of demand as a critical problem were largely composed ofthese enterprises.

The wood products subsector has experienced somewhat of an export boom as a result ofdevaluation of the cedi. Firms interviewed in this subsector can be analyzed in two groups. The firstproduces furniture and other wood products for domestic middle and low income households and has thesame problems as many other small firms lack of demand for their products due to depressed incomesamong their customers; lack of working capital for raw materials and the need for updated equipment.

T-he second group includes several small sawmills that are producing lumber for export; theirproblems are somewhat unique to the subsector. Those interviewed said that they could sell all that theycan supply. Rather, the problem is obtaining a greater supply of logs. Timber can only be harvested bythose who have concessions for particular tracts, a right that has been garnered mainly by the large firms.The equipment needed to fell and transport large trees is large and costly. Likewise, the machinery neededto plane the logs into lumber in a large volume represents a significant capital investment. Small sawmillsare filling the gaps by supplying extra lumber needed by large firms to fill orders and selling to thoseexporters who deal with small volumes. Their operations are constrained by lack of finance: the price oftimber has been bid up by its increased profitability, and lack of working capital limits them to the purchaseof only a few logs at a time. In addition, there are problems obtaining sufficient logs due to a shortage oflorries which must be rented to carry logs. Small orders are far more expensive and difficult to arrange.The equipment used by small firms to cut the logs into lumber is primitive--a generator drives a circularsaw attached to a pulley down the length of a log and slices off a four-inch board while a boy runs thelength of the board pouring water over the saw blade to keep it from overheating and burning the wood,Relatively small loans for new saws and blades clearly would have a large impact on productivity.

L4/ Most of these fairly basic raw materials are made by public enterprises. High prices may beattributed both to liberalization of price controls and to the inefficiency of many public enterprises.

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Table 18: Major Constraints on Future Expansion by Subsector(percentage of respondents in each category)

Tctiles and Wood and Soaps and BuildingConstraints on expansion W Total sample Food processing garments wood products cosmetics materials Metal products

Can't get credit for raw materials 56 64 63 42 33 67 57

Can't get credit for equipment 44 17 50 58 0 17 43

Local raw materials are tooaepensive 36 43 50 33 17 33 21

Imported raw materials are tooexpensive 29 43 13 0 50 33 29

Equipment is old and needsreplacing 19 14 13 25 17 0 29

Taxes 12 0 38 17 0 0 7

(Number of firms) y/ (82) (15) (9) (13) (7) (7) (15)

J Frms could list up to three constraints; hence the percentages can add to more than 100 percent. Problems listed by less than 12 percent of firms are not shown.

y Total includes 12 firms in other subsectors.

IV. ENTREPRENEURS' VIEWS OF REGULATORYENVIRONMENT ISSUES

The survey data show that, on the whole, the regulatory environment is not the paramount problemfor the current operation or expansion of existing businesses. Nor did those surveyed see it as a principalconcern for investors: only taxation ranks with credit and demand as signifficant constrainis on newinvestment. Regulatory problems appear to affect larger firms more than smaller ones and exporters morethan those producing for the domestic market. SSEs are less affected, and less likely to cite improvements.

"The regulatory environment" is interpreted broadly to cover factors that affect the ease and riskof operating a business in Ghana, apart from the normal production, sales, and profit-and-lass aspects.Regulations are an important aspect of the business environment, since they represent the most directexpression of the government's attitude toward business. Regulations are taken to include any aspect ofbusiness operation that is restricted or requires approval by the government. Although taxes normally canbe considered with other determinants of profit and loss, they are included here in the regulatory iFrameworkbecause they have become intertwined with regulations: Tax Clearance Certificates (TCCs) are required tocarry out virtually all business activities subject to regulation, such as importing, exporting, registeringvehicles, and even obtaining visas. Other related aspects of the business environment that are also surveyedinclude uncertainty about the economy and about the government's intentions toward private investors andthe availability and reliability of infrastructural services such as electricity and transport, which can affectthe operation of business quite apart from the direct cost of the service.

The sample of firms discussed in this section includes an additional 24 large-scale firms that werenot part of the survey discussed in preceding sections. These additional firms include a number of largeones over 100 workers, and many are expatriate- or government-owned. It was hypothesized that thesefirms may have somewhat different views of the environment from the almost exclusively Ghanailan-owned,private firms that dominated the SME survey.!/ Tables 15 and 16 summarize the results, which arediscussed below.

The Current Regulatory Environment

As discussed in Section II, demand and credit dominated firms' responses to a request for their topfour problems of operation. Their most significant concern related to the regulatory environment is taxes,cited by 14 percent of firms (30 percent of large-scale firms; Table 19). Infrastructure is the next mostserious category of business problems, especially electricity interruptions (7 percent of respondents) andtransportation costs (5 percent; higher for small- and medium-scale firms). Only 5 percent mentioned thebusiness environment generally, and just 3 percent (large-scale firms only) mentioned regulations or licensingas a problem.

Nevertheless, as many firms (22 percent) said that government regulations have become harder todeal with since the ERP began as said that they have become much easier (Table 19). These perceptionsdiffer by size category. Over three-quarters of medium- and large-scale firms said that regulations hadbecome easier since 1983 and only 8 percent said they were worse. In contrast, over 43 percent of SSEssaid that regulations have become more difficult to deal with--approximately the same share that citedspecific regulatory problems (mainly location and labor restrictions, and licensing to a lesser extent).Furthermore, medium- and large-scale firms were quick to cite regulatory problems, despite theimprovement; only 18 percent said they had no problems, as against 56 to 62 percent of the smaller sizecategories. Although regulatory problems may not be the most significant immediate concern, some

D/ Only one of the firms in the SME sample exceeded 50 workers; even the "large" category in thepreceding analysis is not very large, except where additional large firms from a separate survey areincluded.

attention is warranted to reduce remaining problems and reverse indications of an adverse trend, whetherthey reflect fact or perceptions by SSE owners. Further steps are needed to build confidence that theGovemment's actions will match its intentions, or the supply response could be retarded even if demandand credit expand.

Table 19: Regulatoqy Problems for Current Operation by Firm Size(percentage of respondents in each category)

Size categories: yAll firms

Problem surveyed W/ Very Medium,Micro small Small large at

Share citing business environment issuesamong top 4 problems of operation

Taxes 14 9 4 13 30Infrastructure:

Electricity outages 7 6 12 0 7Transportation costs 5 3 8 13 0Other 6 3 12 13 0

Business environment 5 0 8 0 14Regulations, licensing 3 0 0 0 14Getting foreign exch. 4 0 0 6 0

Share citing business environment issuesamong top 4 problems for expansion

Taxes 12 14 4 31 0Electricity outages 3 0 8 0 0Regulations, licensing 3 0 8 0 0

Difficully of dealinz withregulations now vs. 1983

Much easier 22 17 14 0 38Somewhat easier 31 33 14 33 38About the same 26 39 29 22 17Worse 22 11 43 44 8

Maior regulatory problemsNone 48 56 62 56 18Firms citing problems 52 44 38 44 82

Percentage citing: _/Location 17 31 29 13 12Employment reg's 10 0 0 25 29Minimum wage 7 0 5 13 18Price controls 7 0 5 0 29Licensing 6 0 5 13 12Registration 6 25 5 0 0Investment code 5 0 0 0 24Other 7 0 5 0 29

(Number of firms) (106) (33) (26) (16) (31)

A Includes 24 large-scale firms that were asked the same questions in a separate survey.

PI Size categories are based on the number of full-time workers in 1989: micro = 3 or fewer; small = 4-9;medium = 10-29; large = 30+.

'/ The subtotals add up to more than the total because some firms cited two problems.

- 38 -

The nature of regulatory problems also differs by size category among those firms giving responses.Location is the dominant concern of micro and very small enterprises, some of which have been forced torelocate away from main thoroughfares or be demolished by the Accra Metropolitan Authority (and otherurban councils).!!/ For example, a wood carver who had to relocate along with the timber markeit in Temahas lost virtually all his trade because the new location is far from the main road. Like many sma3ll prod-ucers, he sold primarily to passers-by rather than to people specifically seeking out his product, Rattanfurniture makers near the Accra Airport are no longer allowed a small structure in which to store stock,so they can only display what they can carry each day. Wayside vehicle repair establishments lhave beenmoved far away from the main road.

Registration (or the lack thereof) as a business enterprise--a comparatively simple and automaticprocess at the Registrar-General's Department--apparently poses some difficulty for a number ofmicroenterprises and very small firms.HI Licensing (by MIST) is seen as a problem by some SSEs. Neithelregistration nor licensing bothers large firms, which have the personnel and access to accomplish these tasks,Current efforts by the National Board for Small-Scale Industries (NBSSI) to ease the registration/ licensingprocess through field agents (rather than centralizing it in Accra) would probably help SSEs. Acomplementary measure would be to make the issuance of a manufacturing license (at least a pirovisionatone) virtually automatic as an instrument of monitoring the establishment of industries, rather than a meanrsof controlling investment. The licensing information can be forwarded to the relevant officials, who caninspect the enterprise if needed.

Medium- and large-scale firms face a wider range of regulatory problems than smaller ones. Tihefact that price controls are mentioned as a problem by 29 percent of these respondents shows that prieshave not yet been fully liberalized in practice. Labor regulations--both restrictions against laying off workersand minimum wage requirements--are important for them, but not for very small and micro enterprises.Only medium- and large-scale firms cited investment code benefits as a concern; smaller firms presumablydid not even hope to obtain them.

Firms were asked to list the three most important obstacles if they wanted to expand the.ioperations, assuming that demand was sufficient. The principal constraint cited was inadequate finance, notbusiness environment issues. Among the latter, taxes again ranked highest (12 percent of all firms;Table 17). Electricity problems and regulations were each mentioned by only two small-scale firms.

Problems for Investment

With respect to new investment, firms were asked to rate the importance of specific businessenvironment and related concerns. Uncertainty about the economy was seen as a restraint on investmentby 38 percent of respondents, especially those with 10 or more workers (Table 20). Medium- and large-scale firms also expressed some reservations about the government's attitude toward private investment; 36

Z/ The city officials stated that they are aware of the need to encourage small businesses and that theyhave exercised considerable patience in getting them to leave land on which they held at best apermit subject to termination on 72 hours notice. The authorities (at least in Accra) are trying toorganize small producers and sellers and provide them specific locations. The question is whetherthis can be accomplished with greater participation by the entrepreneurs and without destroyingtheir investments or moving them far away from their customers. At the minimum, the businessenvironment would benefit from greater consultation between local authorities, the nationalgovernment, and the entrepreneurs concerned before actions are taken.

Z/ The process of going to the Registrar-General's Office in Accra to register is relatively costly andintimidating for self-employed, often poorly educated microentrepreneurs. Microenterprises that arenot registered as a business face possible harassment from the authorities.

- 39 -

percent saw it as a moderate or major problem (although 56 percent said it was not a problem). But theoverwhelming majority of microenterprises and SSEs saw no problem with the government's attitude.

Taxation is the main aspect of the regulatory environment that is seen as a moderate or majorproblem for new investment (62 percent).!/ Only a quarter of respondents in all size categories said thattaxes are not a problem (usually businesses that are doing well and paying their taxes regularly and thosenot involved in importing or exporting, where TCCs are a problem). Registration is regarded as no problemby 91 percent of respondents. Only large-scale firms see obtaining other approvals (including investmentcode benefits) as a moderate or major problem, and about 60 percent of them do not.

The overwhelming choice as the major constraint on new investment is credit (89 percent). Demandis the other major problem facing all size groups, especiallly microenterprises. Although not a principalconstraint on investment, information on and access to technical assistance is a concern for about a thirdof respondents in all size groups except large-scale firms. All of these constraints rank higher than specificregulatory issues other than taxes.

Nevertheless, the level of concern about different aspects of the regulatory environment issufficiently high to suggest that it could inhibit investment response, especially as credit and demandconstraints are eased. Economic and political stability and a positive attitude toward private profit wouldhelp reduce uncertainty. The cost of doing business coul,d be reduced through lower, more transparenttaxation. Export procedures, as well as financing, need imrprovement for SSEs to live up to their exportpotential. In addition to such measures, a long-run strategy should include complementary education andtechnical training to enhance the contribution of Ghana's small entrepreneurs to industrial development

2/ Infrastructure was not included in this series of questions.

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Table 20 Problems of Business Environment for New Investment, by Fwim Size(percentage of respondents in each categosy)

Size categories: kIProblems and its All firmsimportance suvyed I/ Very Medium,

Micro small Small large _W

General business climate

Uncertainty about economyModerate/major 38 37 27 46 45None 32 30 42 23 33

Government attitude towardprivate investment

Moderate/major 16 8 10 0 36None 76 84 77 100 56

Refulatory Problems

Level of taxesModerate/major 62 52 72 69 64None 24 23 24 23 25

Government approvals(other than registration & Inv. Code)

Moderate/major 9 0 5 0 24None 73 91 81 62 59

Getting investment code benefitsModerate/major 7 0 0 0 22None 73 100 100 100 61

Getting registeredModerate/major 2 0 4 0 3None 91 83 92 86 90

Other problems

Getting creditModerate/major 89 87 91 100 83None 7 7 9 0 8

Level of demandModerate/major 55 68 34 50 60None 33 19 43 36 37

Getting technical assistanceModerate/major 26 35 32 36 11None 53 50 37 45 70

(Number of firms) (106) (33) (26) (16) (31)

a Includes 24 large-scale firms that were asked the same questions in a separate survey.

y Size categories are based on the number of full-time workers in 1989: micro = 3 or fewer, small = 4-9,medium = 10-29; large = 30+.

Note. The percentage responding "minor problem" is not shown.

- 41 -

BIBLIOGRAPHY ON SMALL ENTERPRISES IN GHANA

Anheier, Helmut K, and Hans Dieter Seibel. 1987. Small-Scale Industries and Economic Development inGhana: Business Behaviour and Strategies in Informal Sector Economies. Saarbrucken, 13ermany:Breitenbach Publishers, Cologne Development Studies No. 3.

Aryee, George. 1981a. "The Informal Manufacturing Sector in Kumasi." In S. V. Sethuraman, ed. TheUrban Informal Sector in Developing Countries: Emploment. Poverty and Environment. Geneva:ILO, WEP Study.

_ 1981b. 'Income Distribution, Technology and Employment in the FootwearIndustry." Geneva: ILO, WEP 2-23/WP96 = WEP 2-221WP78.

_ 1977. "Small Scale Manufacturing Activities: A Study of the Interrelationshipsbetween the Formal and Informal Sectors in Kumasi, Ghana." Geneva: ILO, WEP 2-19/WEP 23.

_ 1976. "Effects of Formal Education and Training on the Intensity of Employmentin the Informal Sector: A Case Study of Kumasi, Ghana." Geneva: ILO, WEP 2-18/WP 14 = WEP2-19lWP17.

Boon, E. K. 1989. "Women in SMEs: An African Example." he Courier 115 (May-June): 74-76.

Browne, A W. 1981. "Appropriate Technology and the Dynamics of Village Industry: A Case Study ofPottery in Ghana." Institute of British Geographers Transactions 6, 3: 313-323.

Checchi and Company. 1976. 'Small-Scale Industry Development in Ghana.' Washington D.C.: Checchiand Company, report prepared for the Government of Ghana.

Dawson, Jonathan. 1988. "Small-Scale Industry Development in Ghana: A Case Study of Kumasi!London: Overseas Development Administration, ESCOR, processed.

Department of Housing and Planning. 1971. "Social and Economic Study of Suame Magazine, Kumasi."Kumasi: University of Science and Technology.

Ghana Enterprises Development Commission. 1976. "The Policy and Guidelines of the GEDC' for theAdministration of the Small Business Loan Scheme. Accra: GEDC.

Ghana, Republic of. 1974. Report on the Role and Activities of the Office of Business Promotion!. Accra:Ghana Publishing Corporation.

. 1965. Area Sample Survev of Small Manufacturing Establishments - 1963. Accra:Central Bureau of Statistics.

Hakam, A. N. 1978. "Technology Diffusion from the Formal to the Informal Sector: The Case of theAuto-Repair Industry in Ghana." Geneva: ILO, processed.

Hart, J. Keith. 1973. 'Informal Income Opportunities and the Structure of Urban Employment in Ghana."Journal of Modern African Studies, 11, 1 (March): 61-89.

Holtermann, Sally. 1979. Intermediate Technology in Ghana: The Experience of Kumasi University'sTechnology Consulting Centre. London: Intermediate Technology Publications.

Ibrahim, S. B. 1985. "The Development of Local Engineering Capability in Ghana: The Potential of Small-Scale Informal Metal Enterprises." Glasgow: University of Strathclyde.

Ingram, William D., and Scott R. Pearson. 1981. 'The Impact of Investment Concessions on theProfitability of Selected Firms in Ghana.' Economic Development and Cultural Change, 29, 4(July): 831-839.

Kelley, Ray S. 1987. 'Investment Climate Assessment iand Private Sector Strategy Suggestions: Ghana.'Washington, D.C.: United States Agency for International Development, Office of PrivateEnterprise, processed.

Kennedy, Paul T. 1981. "Role and Position of Petty Producers in a West African City.' Journal of ModernAfrican Studies 19, 40 (December): 565-594.

. 1980. Ghanaian Businessmen: From Artisan to Capitalist Entrepreneur in aDependent Economv. Munich: Weltforum Verlag, IFO-Institute for Economic Research, Africa-Studies no. 106.

. 1977. 'Indigenous Capitalism in Ghana,' Review of African Political Economy(January).

Ntim, B. A., and J. W. Powell. 1976. *Appropriate Technology in Ghana: The Experience of KumasiUniversity's Technology Consultancy Centre.' Ch. XIV in Nicolas Jequier, ed., ApproprateTechnology: Problems and Promises. Paris: OECD Development Centre Studies.

Ofori-Amoah, Benjamin. 1988. 'Improving Existing Indigenous Technologies as a Strategy for theAppropriate Technology Concept in Ghana.' Industry and Development 23: 57-79.

Page, John R., Jr. 1978. 'Economies of Scale, Income IDistribution, and Small- Enterprise Promotion inGhana's Timber Industry.' Food Research InstiiLute Studies 16, 3: 159-182.

Powell, J. W. 1986. 'Ghana: A Grass-Roots Industrial Revolution.' Appropriate Technology, 13, 3(Intermediate Technology News insert).

. 1981. 'Strategy for the Development of Informal Industries in Ghana." PlanningOutlook, 23, 1: 33-37.

Riedel, Jurgen, Hubert Schmitz, et al. 1988. Small-Scale Manufacturing and Repair Activities in the UrbanArea of Techimant/Ghana. Munich: Weltforum Verlag, IFO-Institute for Economic Research, AfricaStudies no. 115.

Sethuraman, S. V. 1977. 'Employment Promotion in the Informal Sector in Ghana.' Geneva: ILO,WEP 2-19/WP 24.

Steel, William F. 1981. 'Female and Small-Scale Employment under Modernization in Ghana.' EconomicDevelopment and Cultural Change. 30, 1 (October): 153-167.

. 1979. 'Development of the Urban Artisanal Sector in Ghana and Cameroon.,Journal of Modern African Studies 17, 2 (June): 271-284.

. 1977. Small-Scale Emplogment and Production in Developing Countries: Evidencefrom Ghana. New York: Praeger.

Sonnu, S.B.K. 1975. 'The Wayside Fitters: A Study of Small-Scale Vehicle Repair Activities in UrbanAreas of Ghana.' Kumasi: University of Science and Technology.

- 44 -

Technology Consultancy Centre. 1989. 'What Scope for Small-Scale Industries? Summary oi' Survey inKumasi.' TCC News 68 (May): 8-9. Kumasi: University of Science and Technology.

Thomi, W. H., and P. W. K Yankson. 1985. "Small Scale Industries and Decentralization in Ghana.'University of Ghana Department of Geography and J. W. Goethe Universitat Fistitut furWirtschafts- und Sozial-geographie, processed.

United Nations Economic Commission for Africa. 1987. "Women as Small-Scale Entrepreneurs in Zambia,Cameroon and Ghana.' Addis Ababa: ECA/ATRCW/87/3/3.4 (iii).

van Heemst, Jan, 1982. '"Scale, Organisation and Efficiency in Footwear Production: An Analysis of SomeGhanaian Data,' The Hague: Institute of Social Studies, Occasional Paper no. 95.

Yankson, P. W. K 1986. 'Small-Scale Industries in the Implementation of a Growth Centre ';trategy ofRegional Development: A Case Study in Ghana." Industry and Development 17(UNIDO/E.86.I.B.1).

. 1983. 'Employment and Income Generation in the Petty Commodity Sector of theUrban Economy: The Case of the Central Region of Ghana.' Africa Development 8, 3: 75-97.

OTHER REFERENCES

Anderson, Dennis. 1982. 'Small Industry in Developing Countries: A Discussion of Issues.' WorldDevelopment 10, 11 (November): 913-948.

Bolton Committee. 1971. Bolton Committee eprt: Small Firms. Cmnd. 4811. London: Her Majesty'sStationery Office. Quoted in Little, et al, 1987.

Bruton, Henry. 1990. "Broad Based Growth.' Paper presented at a Workshop on Research Priiorities forPolicy Reforms Supporting Broad-Based Growth and Democracy." Washington, D.C.: USAID/-APRE/SMIE.

Cortes, Mariluz, Albert Berry, and Ashfaq Ishaq. 1987. Success in Small and Medium-Scale Enterprises:The Evidence from Colombia. New York: Oxford University Press, for the World Bank.

Haggblade, Steve, Carl Liedholm, and Donald C. Mead. 1986. 'The Effect of Policy and Policy Reformson Non-Agricultural Enterprises and Employment in Developing Countries: A Review of PastExperiences.' Washington, D.C.: USAID, Employment and Enterprise Policy Analysis ProjectDiscussion Paper No. 1.

Kilby, Peter. 1988. 'Breaking the Entrepreneurial Bottleneck in Late-Developing Countries: Is there aUseful Role for Government?' Journal of Development Planning. 18: 221-249.

Liedholm, Carl. 1990. 'The Dynamics of Small-Scale Industry in Africa and the Role of Policy.'Washington, D.C.: USAID, GEMINI Working Paper No. 2.

Liedholm, Carl, and Don Mead. 1987. "Small Scale Industries in Developing Countries: Empirical Evidenceand Policy Implications." East Lansing: Michigan State University International Developmrent PaperNo. 9.

- 45 -

ittle, Ian M. D., Dipak Mazumdar, and John M. Page, Jr. 1987. Small Manufacturine Enterprises: AComparative Analysis of India and Other Economies. New York: Oxford University Press, for theWorld Bank.

Meier, Gerald M., and William F. Steel, eds. 1989. Industrial Adjustment in Sub-Saharan Africa. NewYork: Oxford University Press, for the World Bank.

Nanjunican, S. 1987. "Small and Medium Enterprises: Some Basic Development Issues." Industr andDevelpment, 20: 1-50.

Schmitz, Hubert. 1982. 'Growth Constraints on Small-scale Manufacturing in Developing Countries: ACritical Review." World Development. 10, 6 (June): 429-450.

Staley, Eugene, and Richard Morse. 1965. Modern Small Industry for Developing Countries. New York:McGraw-Hill.

Steel, William F., and Yasuoki Takagi. 1983. "Small Enterprise Development and the Employment-OutputTrade-Off." Oxford Economic Papers, 35: 423446.

UTNIDO. 1989. "Environment Conducive to Sustained Growth of Small- and Medium-Scale Enterprises."Discussion Paper ID/WG.492/4 for the First Consultation on Small- and Medium-Scale Enterprisesincluding Co-operatives, Bari, Italy.

World Bank. 1990a. Adjustment Lending Policies for Sustainable Growth. Washington, D.C.: World Bank,Policy and Research Series No. 14.

_. 1990b. Making Adjustment Work for the Poor. Washington, D.C.: World Bank.

. 1989. Sub-Saharan Africa: From Crisis to Sustainable Growth. Washington, D.C.: WorldBank.

- 46-

ANNEX A

SUMMARY OF CASE STUDY OFSMALL INDUSTRY IN GHANA

In "Small-Scale Industry Development in Ghana: A Case Study of Kumasi",'! Jonathall Dawsonpresents the results of his survey of 672 small firms, most of them vehicle repair, metal products andfurniture and construction. In-depth interviews were conducted with 43 small business owners. The mainobjective of the study was to gauge the sustainability of small-scale enterprises (SSEs) in the cbangingenvironment in Ghana, particularly in response to the ERP. Dawson began with the assumption that SSEsboomed in the late 1970s due, in part, to the decline of larger, more formal industry in Ghana. HeI alsoassumed that the Economic Recovery Program (ERP), launched by the government in 1983, wouldcontribute to revitalization of large industry. The study describes the ERP as a double-edged sword thaitcan both threaten small firms' new-found markets through greater imports and domestic competition aTrincrease opportunities for small firms to strengthen their linkages with large firms.

The study found that although most small firms prospered from 1974 until 1984, the majoritydeclined over the past five years. Fifty-eight percent said that demand for their product had declined since1983, 25 percent reported stable demand, and 14 percent claimed an increase in demand. A central questiorasked by the study is why so many small firms have declined since 1983. The in-depth interviews revealeCthat recapture of markets by large firms was relatively rare--those firms that had carved out iniches forthemselves were able to maintain them in most cases. Likewise, the increased volume of imports folloningtrade liberalization has had a relatively negligible effect on most small enterprises interviewed, due in paitto firms' abilities to produce the more irregular, bulky items that typically are not imported.

The principal sources of decline were found to be: (i) loss of the advantages obtained on the blackmarket under previous policies that rationed foreign exchange, e.g., a decline in cheap smuggled spare par oused by small repair shops; (ii) increased prices of imported and domestic raw materials and inputs due toprice liberalization and inflation; (iii) the breakdown of previous supplier and customer credit arrangemenLtsresulting from severe shortages of working capital; (iv) falling real incomes and depressed purchasing poweramong the urban and rural poor; and (v) excessive competition among small producers with falling profi.margins and fewer orders per enterprise due to large numbers of new entrants.

Microenterprises

Dawson addresses the problem of over-competition among microenterprises in detail. Demand forsmall firms' products has grown but the number of microentrepreneurs has grown at a faster rate. Theresult has not been expansion of existing firms but an explosion in the number of small firms as manyindividuals choose to open their own businesses rather than creating partnerships or working for someoneelse. Profit margins in Suame (one of the areas surveyed) fell in 1984 and 1985 when the numbers of newentrants surpassed the volume of work to be done.

Saturation of the microenterprise sector is occurring for several reasons: workers in Suame havebeen successful in the past and their success has drawn others; the numbers of young people seeking workhave grown due to high population growth; and opportunities for employment have shrunk in other sectors.The apprenticeship training system is a major source of new entrants. Dawson quotes a 1978 study by A.N. Hakam which found that 43 percent of the 686 apprentices studied established their own businesses.A vicious circle arises when entrepreneurs are forced to take on apprentices to boost their incomes eventhough they are, in effect, training their competition.

1/ London: Overseas Development Administration, ESCOR, 1988, processed.

ANNEX A

Entrepreneurship

Among metal-workers, Dawson identifies two groups of entrepreneurs who have made notableefforts to adapt their businesses to the changing economic environment. In the first, existing entrepreneursescape some of the fierce competition of the mainstream and create niches for themselves through relativelyminor innovation and diversification, using mainly local materials. The examples given include thefashioning of spare parts and the production of low-cost import substitutes, e.g., agricultural implements.Dawson characterizes this group as "an organic growth from informal sector seedbeds." They generallycontinue as labor-intensive enterprises that produce in small quantities and sell to individuals. Theiradaptations and innovations enable them to maintain profitable businesses.

The second group involves 'an injection of new blood." These entrepreneurs are better educated,often in engineering, with access to capital and good contacts with large firms. Some of them come frompiior employment in large firms and some come from technical colleges. They have fairly advancedtechnical skills and an ability to "see the technical feasilbility of increasing the sophistication of localproducts." They often are able to purchase the initial capital equipment needed to start at a relativelyhigh level of capacity and expand into niches not taken by large firms and imports. The firms reportingan increase in demand over the past five years tended to come from this group, which is more dynamic thanthe first because of its technical skills, financing capability,) and contacts.

Constraints

Demand is the principal constraint on the ability of most very small firms to expand. Low entrybarriers and a rapidly growing labor supply generate shrin]king individual shares of the market.

The technological and financing needs of the bulk of microenterprises can be met through informal,local mechanisms without external institutional suppor. Working capital is often provided through anadvance by the customer. But the more sophisticated firms, i.e., the second group of entrepreneursmentioned above, are held back by lack of access to credit for working capital and equipment. Informaland family sources of credit are not sufficient to finance their growth. Banks have not acknowledged theviability of these dynamic small and medium firms, and credit generally has not been made available tothem, especially for term finance.

For the majority of microenterprises, apprenticeships provide sufficient training to run theirbusinesses. Microenterprises use little marketing or advertising; they sell mostly through personal contactsand essentially wait for people to come and place orders. Training, particularly assistance with marketing,becomes relevant and useful only when firms have upgraded their technology. For Dawson, upgradedtechnology is a prerequisite for the growth of many of the SSEs--a necessary if not sufficient condition forenterprise success. As firms grow and production expands, the ability to identify and enter new marketsbecomes especially important.

Dynamic Potential

Despite the limitations on the majority of microenterprises, Dawson sees the small-scale sector ashighly dynamic, especially comparing his findings to a 1977 study in Kumasi. Shifts in the composition ofthe labor force and in the technologies used indicate increasing sophistication. Whereas the firms studiedin 1977 relied almost entirely on apprentices, by 1988 almnost one in five firms had at least one salariedworker. Use of family labor had also diminished; 47 percent of Dawson's firms employed no familymembers. He found that this labor shift reflected use of more advanced technologies; many firms neededmore technically skilled labor than can be provided by apprentices or family members.

- 48 -

ANINE --

Dawson sees 'a significant qualitative technological leap forward in the productive capacity ofsurveyed firms," especially when compared with the 1970s. Forty-five percent of firms have at least onepower-driven piece of equipment, many of which are manufactured in Kumasi and some of which arepurchased second-hand from large firms. Earlier firms had little access to foreign technologies, negligiblefixed assets, few salaried workers, no links with the formal sector, and no written records. Many currentSSEs use modern technologies, have prior employment with large finns (25 percent of the sample eitherworked in large firms or completed training in a technical institute), produce a wide range and quality ofproducts, penetrate new markets and have established linkages with large firms or government institutions.

Condusions

Dawson arrives at three main conclusions. (i) Almost ali small firms in Ghana operate outside ofthe formal institutional framework that exists, in part, to serve them. Institutions that should be thoroughlyfamiliar with small and micro firms know little about them and do not offer services that could be of use.Small firms likewise are mostly ignorant about services that could and should be available to them. (ii) Theneeds and constraints of small firms vary a great deal across subsectors. (iii) In some subsectors, SSEs canplay an important role in job creation and provision of cheap consumer goods.

- 49 -

ANNEX B

CHARACTERISTICS AND PATTERNS OF EMPLOYMENT CHANGE IN 1989 SURVEY BY FIRM SIZE AND PERIOD OF ESTABLISHMENT

No. of workers: 1989 employment levels: Average annual growth (%)Period and size group Cap'y Monthly Import ------------ --- -------- ---------- --

(number of firms) util. sales: share Full Parl 1975- 1983- Start-(%) C'000 (%) Start 1975 1983 Total time time Male Female 83 89 1989

ALL FIRMS ESTABLISHED BY 1983 /Microenterprises (15) 37.5 607 18.6 1.9 na. 1.9 4.6 3.3 1.2 3.7 0.6 n.a. 13.4 9.7Very small (14) 40.5 304 19.6 5.3 n.a. 5.0 6.4 4.5 1.9 5.1 1.4 na. 1.0 1.3Small (13) 30.1 2767 44.3 7.8 na. 12.3 17.8 17.2 0.7 11.5 6.2 n.a. 0.7 8.1Mediumnarge (6) 29.9 2876 40.0 24.0 n.a. 62.2 36.2 30.5 5.7 22.3 13.8 na. -14.2 1.1

FIRMS ESTABLISHED BY 1975 a/Microenterprises (4) 42.2 48 3.3 1.3 1.8 1.8 4.8 3.8 1.0 4.5 0.3 0.0 16.0 10.3Very small (7) 40.8 412 23.6 6.0 4.6 4.3 7.6 4.7 2.9 5.9 1.7 -0.2 6.2 2.0Small (7) 31.4 2143 43.3 8.9 16.2 13.0 17.3 16.0 1.3 8.1 9.1 0.5 3.1 8.1Medium/large (5) 25.9 1851 44.0 20.5 45.8 67.0 28.2 26.4 L. 14.0 14;. 7.6 -172 -. 1

> FIRMS ESTABLISHED 1976-833/Microenterprises (11) 35.4 811 22.7 2.1 na. 1.9 4.5 3.2 1.3 3.4 0.7 na. 12.5 9.6Very small (7) 40.2 196 15./ 4.7 n.a. 5.7 5.3 43 0.9 4.3 1.0 na. -2.9 0.7Small (6) 28.6 3495 45.2 6.7 n.a. 11.5 18.5 18.5 0.0 15.5 2.7 n.a. -3.9 8.1Medium/large (1) 50.0 8000 20.0 38.0 n.a. 38.0 76.0 51.0 25.0 64.0 12.0 na. 12.2 12.2

FIRMS ESTABLISHED 1984-89 yMicroenterprises (11) 33.9 55 8.6 1.4 n.a. n.a. 2.4 2.0 0.4 2.0 0.1 n.a. na. 7.6Very small (7) 37.9 985 29.8 3.8 na. n.a. 6.4 5.8 1.3 5.3 1.2 na. na. 45.1Small (6) 41.0 1323 32.1 10.6 na. n.a. 14.9 14.0 0.9 11.7 3.1 n.a. na. 19.2

a/ Size categories are based on total 1983 employment for finns established by then. Average annual growth is weighted by 1983 employment.b/ Size categories are based on total 1989 employment for firms established after 1983. Average annual growth is weighted by employment at start-up.

Note: n.a. = not applicable.

ANNEX C

EMPLOYMENT IN SMALL AND LARGE MANUFACTURING FIRMS, 1963-84

Year and Food & Textiles, Chemicals, Building Wood Metalsize category beverages garments cosmetics materials a/ products products _I Other Total

1960 Census 49,390 89,714 2,754 8,742 41,729 19,585 24,048 235,962

1963Censusc/ 67,900 97,876 3,241 10,009 42,566 22,042 27,932 277,054Large-scale 3,250 2,096 n.a. na. 15,682 3,516 7,321 31,865Small-scale:

Enumerated 68,979 57,357 n.a. n.a. 23,822 18,806 15,063 184,027Not enumerated -4,329 Al 38,423 n.a. n.a. 3,062 -280 §/ 5,548 61,162

1970Census 160,277 120,949 4,882 14,012 44,606 29,502 40,629 414,857Large-scale 7,054 14,751 2,733 2,099 14,505 3,241 11,516 55,899Small (residual) 153,223 106,198 2,149 11,913 30,101 26,261 29,113 358,958

1984Census 243,138 137,611 24,104 e/ 21,221 60,620 20,789 80,885 588,368Large-scale 11,650 10,672 3,257 2,551 14,034 2,968 10,651 55,783Small (residual) 231,488 126,939 20,847 18,670 46,586 17,821 70,234 532,585

Women in Census1960 37,562 48,256 2,140 e/ 8,118 539 131 2,428 99,1741970 127,164 64,490 1,751 11,451 4,898 331 3,747 213,8321984 216,226 86,698 13,789 16,865 11,149 938 44,241 389,926

Women as % of subsector,1960 76.1 53.8 77.7 92.9 1.3 0.7 10.1 42.01970 79.3 53.3 35.9 81.7 11.0 1.1 9.2 51.51984 88.9 63.0 57.2 79.5 18.4 4.5 54.7 66.3

Large-scale share ofsubsector total (%):

1963 4.8 2.1 n.a. n.a. 36.8 16.0 26.2 11.51970 4.4 12.2 56.0 15.0 32.5 11.0 28.3 13.51984 4.8 7.8 13.5 12.0 23.2 14.3 13.2 9.5

Annual rate of growth 1963-70Census 13.1 3.1 6.0 4.9 0.7 4.3 5.5 5.9Large-scale 11.7 32.1 n.a. n.a. -1.1 -1.2 6.7 8.4Small 13.1 1.5 n.a. n.a. 1.6 5.1 5.1 5.6Women 13.0 2.9 -2.0 3.5 24.7 9.7 4.4 8.0

Annual rate of growth 1970-84Census 3.0 0.9 12.1 3.0 2.2 -2.5 5.0 2.5Large-scale 3.6 -2.3 1.3 1.4 -0.2 -0.6 -0.6 0.0Small 3.0 1.3 17.6 3.3 3.2 -2.7 6.5 2.9Women 3.9 2.1 15.9 2.8 6.1 7.7 19.3 4.4

a/ Non-metallic mineral products (including pottery).i Includes vehicle repair and machinery other than electrical and transport. Census data include basic metals.

s 1960 Census employment projected at 1960-70 compound annual growth rate.yV Negative figure represents underestimate of total (census) employment or double counting in Industrial Statistics and Small

Manufacturing Survey.g/ Includes petroleum, rubber and plastic products.

Source: "Census" = Ghana, Population Census (1960, 1970, and 1974)."Large-scale" - Ghana, Industrial Statistics (1962-64, 1970 worksheets based on quarterly returns and 1985-86)."Small-scale" = for 1963, Ghana, Arma Sample Survey of Small Manufacturint Establishments - 1963; other years, calculatedas a residual by subtracting large-scale from Census figures.

- 51 -

Date of Interview:Interviewer:Interview #:-

[Coder:[Firm ID #:

INTERVIEWING GUIDE FOR SMEs AND INFORMAL SECTOR

(This form is intended to help the interview guide the discussion and recordresponses quickly and systematically. It should not be administered rigidlyas a questionnaire.)

(Circle the number next to the correct response.If no response is given, circle the number next to N/A,

except where instructions say to leave blank)

A. Basic Information

Person being interviewed:

/1. Position: 0. Owner 1. Manager 8. Other (Specify)_

/2. Name (if provided):

/3. Name of firm: _

/4. Address or location:

5. Principal product/activity:

6. Coder: ISIC CodeN/A - 9999

/7. Secondary product/activity:

8. Coder: ISIC Code:N/A - 9999

/9. Origin of firm. Why it was started and when, by whom, with whatproducts? Major differences now vs. when it was established?(Let the person tell the story. Do not prompt; more specific questionswill be asked later)

Note: / before a question means it will not be coded.indicates answers to be filled in by the coder.

- 53 -

ANNEX D

B. Current Problems

10. What are the three largest problems ai-fecting your business now?

I,j,oqLerj Explanation (Write down the responses)

iQ.'}( [ 1 #1 ..__________ ________________

lOB. ] #210G. 1 #3

(After respondent gives own answers, follow up if necessary todiscover the root problem; circle up to 3 responses below.)

Demand

1. People don't have enough money (generally)2. People aren't buying because it is the off season3. Too many other firms in the same business4. Too many imports9. Other demand problems (specify)

Raw Materials

11. Can't get enough local raw materials12. Price of local raw materials is too high13. Can't get enough imported raw materials14. Price of imported raw materials is too high19. Other; (specify)

Technology. Eguipment

21. Equipment is old and needs replacing or updating22. Replacement costs are too high23. Can't get spare parts24. Workshop space is inadequate29. Other; (specify)

Finance

31. Have to give too much credit to customers32. Profits are too low to finance enough raw materials33. Profits are too low to finance new equipment34. Can't get credit for raw materials or working capital35. Can't get credit for equipment36. Banks are too difficult to deal with37. Interest rates are too high39. Other; (specify)

- 54 -

ALNNEX D

Labor. Management

41. Lack of skilled workers; workers don't have the right skills42. Lack of unskilled workers43. High wages and benefits for skilled workers44. High wages and benefits for unskilled workers45. Not allowed to lay workers off46. Inadequate management skills49. Other; (specify)

Infrastructure

51. Lack of electricity52. Interruption of electricity53. Transportation costs are too high59. Other; (specify)

Business Environment

61. Taxes62. Regulations, licensing, permits63. Obtaining foreign exchange64. Rules and policies change too often65. Standards and quality requirements (e.g., for gov't. procurement)69. Other; business environment (specify) _

Marketing and Distribution

71. Too few distributors72. Distributors won't handle the firm's product73. Distributors will pay too little for the firm's products79. Other; (specify)

80. Other tyRe of problem; (specify)

99. NLA = not asked, not applicable, no answer

C. Owner's Training and Use of Institutions

11. What was the owner's motivation for going into business?

llA. Principal reason (circle one) llB. Secondary reason(circle one)

1. because parents/relatives were in business 1.2. few job opportunities elsewhere 2.3. put training to use 3.4. saw a profitable opportunity and took it 4.5. lost job or was laid off 5.8. other (specify) 8.

9. N/A 9.

- 55 -

ANNEX D

12. Did owner engage in any business activity before this one?

0. No1. Yes, trading2. Yes, in the same type of business3. Yes, in some other type of manufEacturing4. Yes, in business other than trading or manufacturing9. N/A

13. Owner's gender: 1. Male 2. Female

14. Current age: _ years old (or: 1. under 40 2. over 40)[coder: leave blank if not answered)

15. Did owner attend school: 0. No (Go to 17) If yes, then how manyyears of school: (including formal training)[coder: leave blank if not answered]

16. Highest level of school completed: 0. None 1. Primary 2. Middle3. Commercial 4. Technical 5. Teacher training 6. Secondary7. Post-Secondary 9. N/A

17. Years of apprenticeship: 0. None _ years[coder: leave blank if not answered]

18. Has respondent participated in goverDnent training or industrialextension programs? 0. No. 1. Yes 9. N/A

If so, what kind of program?

19. Would respondent be interested in a two-week training course in any ofthe following subjects? (circle only the most important one)

0. none1. accounting or bookkeeping skills2. marketing3. skills to obtain financial services from a bank4. more familiarity with different technologies8. other (specify)9. N/A

20. Is owner a member of a trade association or other membershiporganization? 0. No 1. Yes 9. N/A

If so, name of association

- 56 -

AjqNEX D

D. Firm Characteristics

21. Ownership of firm: 1. 100% private indigenous 2. 100% private non-indigenous local resident 3. Joint indigenous and non-indigenous4. Foreign-owned 8. Other (specify) 9. N.A.

22. What year did this firm begin production? 19(or: about how old is the firms? _ years)

23. Approximately how much sales does the firms have in an average month,and how does this vary during the year?

23A. Minimum: during worst month of year:23B. Average value of monthly sales:23C. Maximum: during best month of year:

[Interviewer: if value of sales is unknown, go to 24].[If answered, go to 25].

/24. What quantity of your principal product do you sell on average:

(number) (units)per month

What is the price per unit? [currency][coder: calculate average monthly sales and enter in 23B]

Current Labor (enter 0 for none; leave blank if no answer)

25. Full-time wage workers26. _ Part-time wage workers27. _ Apprentices28. Owners and full-time family members29. Total, all workers, owners and family members;

of which:30. males31. females

(Note: #30+#31 - #29)

Previous total workers (leave blank if no answer; do not enter 0)(including apprentices, owners, and full-time family members)

32. at start-up33. around 1980 (if operating)34. in 198635. at peak (year: 19 )

- 57 -

ANNEX D

E. Product Marketing and Competition

36. At present, is the firms selling everything that it produces? (Followup)

0. No (Go to 38) [demand constraint, accumulating stockinvoluntarily]

1. Yes, and could sell more (Go to 37) [supply constraint]2. Yes, but couldn't sell much more (Go to 38) [demand constraint]9. N/A

/37. If it could sell more than it is producing, what is the main reason itis not producing more?

38. If it could sell all that it could produce, how much more could itreasonably produce with the existing equipment and workers? (Assumeunlimited demand)

_ % more than at present

9999. Firm not presently operating

[For N/A leave blank]

[39. Programmer: Capacity utilization - 100/(1+(<#38>/100))[If capacity utilization rate is given directly, enter here:_ _ ]

40. Where are most of your products sold? Additional sales to:(circle one only) (circle as m8any as apply)

1. in the local town market 1.2. in markets in surrounding towns 2.3. mostly in [main city] 3.4. other countries in [regional grouping] 4.5. overseas 5.8. other (specify) _ 8.9. N/A

- 58 -

ANNEX D

41. What kind of people buy most of the products? Additional sales to:(circle one only) (circle as many as apply)

1. rural people/farmers/villagers 1.2. low-income urban people 2.3. upper-income 3.4. foreigners 4.5. traders 5.6. shops, retailers 6.7. government 7.8. other industries (as inputs) 8.9. N/A

42. Who are the firm's main competitors? (circle one)

0. none1. other small firms2. large domestic firms3. large and small about equally4. imports8. others (specify)9. N/A

43. How many other firms produce and sell in the firm's main market?

0. None 2. 1-2 3. 3-5 4. 6-105. More than 10 9. N/A

44. Has the number of firms producing the firm's main product become greatersince 1986 (or since start-up, if after 1986)?

0. No 1. Yes 9. N/A

45. Does the firm export its product (directly or through traders)?

0. No (Go to 47)1. Yes, export directly2. Yes, export mainly through traders9. N/A

46. If yes, about what proportion of output is exported: _[coder: leave blank if not answered]

47. Is the firm considering producing for exports? 0. No 1. Yes 9.N/AIf no, why not? _If yes, what are the main obstacles?

- 59 -

ANNEX D

F. InDut-OutDut Linkages

48. What proportions of raw materials (or final goods if trader) are:[coder: leave blank is not answered)

48A. % imported by the firm or an importer

48B. % local: produced nearby (including waste and scrap, even ifgenerated from imported goods)

48C. % local: produced elsewhere in [country]

49. Compared to 1986 (or since start-up, if after 1986), is the proportionof raw materials that is imported

0. about the same 1. greater 2. less 9. N/A

50. Does the firm you buy raw materials directly from large firms in[country]? [For large firms: do you sell directly to small firms?]

0. No1. Yes, regularly; What?2. Yes, when can't get in the market; What?9. N/A

51. Does the firm you sell its products directly to large firms in[country]? [For large firms: do you sell directly to small firms?]

0. No1. Yes, on regular contract basis; What?2. Yes, occasionally9. N/A

52. Which public services does the business use? (Circle one)

0 none1. electricity only2. water only3. electricity and water8. other (specify)9. N/A

53. What main problem has it had with these services?

0. none1. occasional interruption2. frequent, longer or serious interruptions3. too expensive4. delay in obtaining8. other (specify)9. N/A

- 60 -

AMMNE D

G. Impact of Adiustment

54. Has the firm purchased new equipment (other than for start-up) since1986? 0. No 1. Yes 9. N/A

55. If yes, what was the main source of finance to pay for it?

Primary source (circle one) Additional sources(Circle as many as apply)

0. profits from the business 0.1. personal savings 1.2. loans or gifts from family or friends 2.3. funds from a savings group or credit society 3.4. credit from supplier 4.5. a loan from a money lender 5.6. a loan from a bank or promotional agency 6.7. one or more co-investors 7.8. other (specify) 8.9. N/A 9.

56. Has the firm changed its mix of products since 1986 (or start-up, ifafter 1986)? 0. No 1. Yes 9. N/A

New productsProducing more ofProducing less ofStopped production of

57. Since 1986 (or start-up, if after 1986), how has production (or capacityutilization) changed? For what single most important reason? (circleonly one)

0. No significant change

1. Increased, because foreign exchange (inputs) more available2. Increased, because local raw materials are more available3. Increased, because demand has increased as economy has grown

4. Increased, other reason (specify)

5. Decreased, because demand is weak6. Decreased, because of competition from imports7. Decreased, because of increased domestic competition8. Decreased, because of high costs of imports (specify)

9. Decreased, other reason (specify)

99. N/A

- 61 -

ANNEX D

58. Is the business currently making profits?(i.e., is owner getting any income out of it?)

0. No 1. Yes 9. N/A

59. Is the business more or less profitable now than at this time lastyear?

0. About the same1. More profitable2. Less profitable9. N/A

60. What are the Dlan for the business ink the future (i.e., actually expectto do)? (Circle one)

0. maintain production at the same level and composition1. maintain production level but switch to a new product2. substantially expand production and capacity (increase size of the

firm)3. expand production without substantially changing capacity (keep

firm about same size)4. reduce production8. other (specify)9. N/A

61. If the plan is to stay at the same level or reduce production, why isn'tthe owner interested in expanding the business?

Main reason (circle only one) Additional reasons:(circle as many as apply)

1. It meets the owners needs at thepresent level. 1.

2. I couldn't sell more if produced more. 2.3. Seasonality of demand. 3.4. No funds to finance an expansion. 4.5. Afraid to risk a new investmenl: 5.8. Other (specify) 6.9. N/A

- 62 -

ANNEX D

H. Finance and Credit

62. How was the start-up of the business financed? (up to two answers)

62A. Primary source (circle one) 62B. Secondary source(circle one)

0. profits from another business activity 0.1. personal savings 1.2. loans or gifts from family or friends 2.3. funds from a savings group or credit society 3.4. advance from a shopkeeper, or supplier's credit 4.5. a loan from a money lender 5.6. a loan from a bank or promotional agency 6.7. one or more co-investors 7.8. other (specify) 8.9. N/A 9.

63. Since start-up, has the business gotten additional funds for expansionor working capital from: (up to two answers)

63A. Primary source (circle one) 63B. Secondary source(circle one)

0. profits from another business activity 0.1. personal savings 1.2. loans or gifts from family or friends 2.3. funds from a savings group or credit society 3.4. advance from a shopkeeper, supplier's credit 4.5. a loan from a money lender 5.6. a loan from a bank or promotional agency 6.7. one or more co-investors 7.8. other (specify) 8.

9. N/A 9.If a loan: amount: [currency]

repayment period

interest: per annum

64. In the past, how have purchases of raw materials normally been financed?(up to two answers)

64A. Primary source (circle one) 64B. Secondary source (circle one)

0. from business profits, cash reserves 0.1. advances from customers 1.4. credit from suppliers 4.6. loan from bank or promotional agency 6.7. bank overdraft 7.8. other (specify) 8.9. N/A 9.

- 63 -

ANNEX D

65. Suppose the firm has an important order to complete next month and needsmoney to purchase the necessary raw materials. From which of thefollowing sources would it most likely be able to obtain the finance:

65A. Most likely source (circle one) 65B. Secondary source (circleone)

0. could not get any finance 0.1. cash reserves of the business 1.2. personal/family savings 2.3. credit or savings society 3.4. suppliers of the materials 4.5. money lender 5.6. loan from bank or promotional agency 6.7. bank overdraft 7.8. other (specify) 8.9. N/A 9.

66. How useful would it be for the enterlprise to receive credit for thefollowing purposes, at approximately 30% annual interest (i.e., pay[currency] 25,000/month interest on [currency] 1 million loan until canpay back the [currency] 1 million):

Not so Moderately VeryUseful Useful Useful z_

67. rehabilitation 1 2 3 9

68. new investment or 1 2 3 9

69. working capital 1 2 3 9

70. If credit would be useful and if commercial banks have money availableto lend to businesses like this one, how easy (in the respondent'soption) would it be to obtain a loan from one:

Very easy Somewhat easy Somewhat difficult Very difficult N/A1 2 3 4 9

Why?

71. Since 1986, has the firm tried to get a loan from a bank or promotionagency?

0. No1. Yes, loan received2. Yes, but not successful9. N.A.

- 64 -

ANMEX D

72. Does the owner or the firm have an account in a bank?

0. No1. Yes, savings account only2. Yes, checking account only3. Yes, checking and savings account9. N/A

I. Regulation and Other Constraints

73. Is this firm registered as a business? 0. No l.Yes 9. N/A

If no, why not: [Go to 75]

74. If so, how long did registration take?

0. Same day 1. less than a month; or # of months _

[coder: leave blank if not answered]

75. Is this firm licensed by the [Ministry of Industries]?0. No 1. Yes 9. N/A

76. If licensed, how long did it take to obtain a manufacturing license?

0. Same day 1. less than a month; or # of months[coder: leave blank if not answered]

77. Are taxes paid to local (district or town) authorities?

0. No 1. Yes 9. N/A

78. Are taxes paid to national authorities?

0. No 1. Yes 9. N/A79. If the owner were starting up your business today as a new investor,

what sort of obstacles would arise, and how serious are they (on a scalefrom 1 - no problem to 4 - major problem):[Note: it may not be necessary to mention all of these one by one.After the most important issues have been covered, the respondent can beasked if there are any other serious obstacles.)

- 65 -

ANNEX D

No MCinor Moderate MajorProblem Problem Problem Problem N/A

80. Getting registered 1 2 3 4 9

81. Getting LocationApproval 1 2 3 4 9

82. Getting otherGovernment approvals 1 2 3 4 9

83. Government attitudetoward privateinvestment 1 2 3 4 9

84. Uncertainty about theeconomy 1 2 3 4 9

85. Getting funds fromfamily members 1 2 3 4 9

86. Getting credit 1 2 3 4 9

87. Cost of credit 1 2 3 4 9

88. Level of demand(not enough buyers;limited market) 1 2 3 4 9

89. Getting technicalassistance 1 2 3 4 9

90. Getting skilled workers 1 2 3 4 9

91. Level of taxes 1 2 3 4 9

92. Getting electricity,water 1 2 3 4 9

93. Transportation 1 2 3 4 9

94. Marketing, access todistributors 1 2 3 4 9

95. Getting equipment 1 2 3 4 9

- 66 -

ANMNE D

No Minor Moderate MajorProblem Problem Problem Problem NA

96. Cost of equipment 1 2 3 4 9

97. Getting raw materials 1 2 3 4 9

98. Cost of raw materials 1 2 3 4 9

/99. Please specify which government regulation the respondent would mostlike to have abolished or reduced, and why:

67 -

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