Promoting the informal sector as a source of gainful employment in developing countries: insights from Ghana

Promoting the informal sector as a source of gainful employment in developing countries: insights from Ghana

Abstract Although the informal sector continues to be the main source of employment in developing countries, little empirical research has been conducted into the human resource management (HRM) issues surrounding this sector in sub-Saharan Africa. Against this background, this study seeks to highlight the HRM issues, such as training and employment strategy, which are assuming increasing importance in the informal sector in developing countries. After reviewing the marginalist and structuralist debates on the informal sector, the paper looks at the Ghanaian government’s attempt to transform the sector into a source of national economic development, entrepreneurship and self- employment. As part of this examination, the paper explores the question of whether the government’s strategies can provide jobs for all who need them.

Based on the evidence of the empirical research, the paper argues that although the current Ghanaian government’s informal employment strategy is a product of political expediency and, therefore, prone to pitfalls, it nevertheless constitutes a worthwhile attempt to combat unemployment in the long term. The paper also contends that in environments of perpetual economic crisis, which undermine the ability of sub-Saharan African (SSA) governments to generate adequate growth, it makes good socio-economic sense to promote the informal sector as a significant source of employment. The government’s strategy should, therefore, be seen as an attempt to help the informal sector generate a level of employment above the marginal and survival. In this respect, the Ghanaian experience provides useful lessons for other SSA countries grappling with similar unemployment problems.

Keywords Informal sector; employment strategy; self-employment; skills training; child labour and street children; sub-Saharan Africa.


It can be argued that work and employment issues in developing countries in general, and in sub-Saharan Africa (SSA) in particular, have received insufficient consideration in the HRM literature. In the last three decades or so, research into HRM, work and employment in developing countries has focused on East Asia and more recently on China (see Cooke, 2005 for a review) while Africa has been relatively neglected (Kamoche, 2002). Fortunately, the publicity surrounding the Tony Blair’s Africa Commission seems, for the moment at least, to have focused media attention on Africa and on how to tackle poverty in the continent. However, Africa’s endemic poverty will

The International Journal of Human Resource Management

ISSN 0958-5192 print/ISSN 1466-4399 online q 2007 Taylor & Francis

DOI: 10.1080/09585190701321716

Yaw A. Debrah, School of Business and Management, Brunel University, Uxbridge, Middlesex,

UB8 3PH, UK (tel: 44-(0) 1895–265239; fax: 44-(0)1895-203149; e-mail: Yaw.Debrah@

Int. J. of Human Resource Management 18:6 June 2007 1063–1084

not be defeated unless governments’ policies succeed in creating jobs for the poor (Fluitman, 2001).

In the past few years, research into work and employment in Africa has tended to focus on large organizations and issues relating to the formal sector (Kamoche, 2002; Kamoche et al., 2004; Budhwar and Debrah, 2004), yet the vast majority of working people in Africa earn their living in the informal sector (ILO, 2002; Johanson, 2002; World Bank, 1994, 2002) either in self-employment or working for micro-enterprises (Kanyenze et al., 2000). More specifically, informal work accounted for 80 per cent of non-agricultural employment, over 60 per cent of urban employment and over 90 per cent of new jobs created in Africa over the past decade or so (ILO, 2002).

In almost all SSA countries today, the informal sector is often the only option for people seeking work (Aryeetey, 1996). As the ILO (2002) confirms, this is because the majority of SSA economies are struggling to generate adequate growth, either in gross domestic product (GDP) or in levels of employment. Consequently, SSA governments are increasingly looking to the informal sector to solve their unemployment problems (Haan, 2001; Haan and Serriere, 2002; World Bank, 2002). Against this background, the present study examines the Ghana government’s attempt to formalize the informal sector and consequently promote productive and gainful employment/jobs in the sector.

This paper follows Charmes’ (1999) definition of the informal sector. Here, the informal sector is defined as comprising: informal self-owned enterprises that may employ family workers and one or more employees on an occasional or continuous basis. Charmes (1999) provides a further statistical definition which distinguishes two main components of the segments of the informal sector as: (i) the ‘family enterprise’ (own account informal enterprises) without permanent employees; and (ii) the ‘micro-enterprises’ (informal employers) with permanent employees. Micro-enterprises are defined as those informal sector units that employ salaried employees (between five and ten) on a continuous basis be they home-based, street-based or established in fixed premises (For more elaborate discussion of the growth and characteristics of the informal sector in Ghana, see ISSER, 2004: 177–200; and for international characteristics see Charmes, 1999).

Table 1 shows the different forms of work/employment found in the formal and informal sectors in sub-Saharan Africa, but more importantly, highlights the range of employment/economic activity in the informal sector. The study focuses on legitimate informal income opportunities in Table 1. The following section sets out the theoretical background for this study.

The informal sector and the employment marginality debate

The concept of the informal sector entered work and employment literature in the 1970s. The term was apparently coined by the British anthropologist Keith Hart, who studied the income earning strategies of poor city dwellers – the urban sub-proletariat – in Accra, Ghana (see Hart, 1970, 1972, 1973). Hart’s seminal work generated copious amounts of literature and fervent conceptual, methodological and policy debates in development studies and economics circles (see Maloney, 2004; Mead and Morrisson, 1996; Rakowski, 1994).

Rakowski (1994) describes how the nature of the debate on the informal sector has changed over the past three decades. In the 1970s, much energy was expended on explaining the terminology and showing its links to the economic concept of dualism. The focus in the 1980s was on understanding the phenomenon, regardless of the new labels and terms used. By the 1990s, the emphasis had shifted to transforming the concept into a tool that governments and others interested in alleviating poverty could use

1064 The International Journal of Human Resource Management

Table 1 Typology of income opportunities in sub-Saharan Africa

Formal income opportunities Informal income opportunities

Legitimate Illegitimate Legitimate Illegitimate


† Public and private sector wage/salary employees † Clergy and employees of established Christian churches † Employees of NGOs † Private education professionals † Travel agents and hoteliers † Industrialists and manufacturers † Self-employed professionals, including:


Other professions allied to medicine, e.g. pharmacists and

laboratory technologists


† Bribery † Networking † Influencing † Fraud † Scams † Cronyism † Corruption

† Traditional healers/herbalists † Spiritualists/diviners † Salvationists and pastors of independent

charismatic churches

† Operators of restaurants and bars † Hairdressers/barbers † Sign writers and shoe shiners † Drivers and porters † Domestic workers

† Prostitution † Armed robbery † Money doubling † Smuggling † Black market

currency exchange

† Drugs peddling


† Shops and kiosk operators † Street vendors/traders † Home veranda traders † Market/foodstuff traders † Bakers † Chemical sellers

Trade, craft and manufacturing

† Tailors and seamstresses † Auto mechanics/repairers/electricians and

other related workers

† Artisanal construction workers † Blacksmiths/Metal workers † Wood processors † Weavers/carvers/embroiderers/ornamental

and jewellery crafts workers

† Food processors † Producers of beverages (beer, liquor, palm

wine, etc.)

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Table 1 (Continued)

Formal income opportunities Informal income opportunities

Legitimate Illegitimate Legitimate Illegitimate

Agricultural production, animal husbandry

and fishing

† Keepers of poultry/goats/sheep/pigs † Producers of grains/vegetables/fruits/etc. † Fishermen and fish processors

Source: compiled from Hart (1973), Tripp (1997); Adu-Amankwah (2000) and fieldwork notes

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for making policy. These historical developments have undoubtedly influenced the

emergence of major approaches, perspectives and themes. One of the recurrent themes in the debate has been the strategies adopted by the poor

to supplement their incomes. This aspect of Hart’s (1973) work initiated a perennial

debate between proponents of marginalist and structuralist characterizations of the

informal sector. The ‘marginalists’ regard the informal sector as peripheral (marginal) to

economic development, whereas the ‘structuralists’ contend that it is a repository for

alternative, vibrant, dynamic and enduring forms of economic activity (Leonard, 2000). Meagher (1995) traces the origins of the marginalist characterization to the early

neo-liberal and Marxist scholars. These scholars argued that the informal sector consisted

of nothing more than traditional activities that existed on the margins of society and

offered workers little more than survival. Their conclusions were based on certain basic

assumptions that underpinned neo-liberal and Marxist theories of development. In brief,

these stated that: (a) the informal sector is only a feature of peripheral economies and is,

therefore, a transitory stage in economic development that is bound to disappear with the

development of modern capitalism/free enterprise; and (b) the sector only encompasses

subsistence-level activities and income. Consequently, the informal sector is only

capable of meeting survival needs (Meagher, 1995) and lacks the potential for

independent growth (Castells and Portes, 1989; Portes and Sassen-Koob, 1987). Meagher (1995) asserts that recent developments have challenged these assumptions.

In her view, far from disappearing in the face of economic development, informal

economic activity is on the increase, not just in the developing world but in many

industrialized (capitalist) nations as well. This, according to Meagher, is indicative of the

informal sector’s economic dynamism under certain conditions (such as recession) in

both developed and developing economies (Meagher, 1995). Proponents of the structuralist perspective include the ILO, the World Bank and

PREALC (in Latin America). In contrast to the marginalists, structuralists see the

informal sector as a reservoir of indigenous entrepreneurial dynamism that has

the potential to generate employment and power growth. Far from being the by-product

of inadequate state intervention, the informal sector is seen as a victim of excessive

intervention. Seen from this perspective, the state monopolizes resources for a small and

inefficient formal sector, forcing the bulk of the population to meet their own needs

outside the regulatory framework of the formal economy (Meagher, 1995). The structuralists argue that the economic dynamism of the informal sector becomes

abundantly clear during periods of structural adjustment, recession or excessive

regulation. In these situations, the entrepreneurialism of the informal sector is not so

much a marginal activity as a valuable economic endeavour – a vibrant source of jobs

and income and a driver of economic growth (ILO, 2002; Rakowski, 1994; World Bank,

1989). Structuralists contend that, even in the face of hostile state restrictions, the

informal sector is thriving in many developing countries. This view is buttressed by

the idea that informal activities may be an integral component or necessary stage in the

evolution of developing market economies – a new path to capitalist (free enterprise)

development (Rakowski, 1994). In this perspective, the informal sector is seen as

teeming with domestic entrepreneurial vigour that should be encouraged, not least

because of its potential as an engine of growth for developing countries (De Soto, 1989;

World Bank, 1989). The structuralists also believe that this economic potential will be wasted unless

action is taken to tackle the weaknesses inherent in the informal sector: namely, low

income, low productivity, and limited skills and technology. They suggest that what the

Debrah: The informal sector as a source . . . developing countries 1067

informal sector needs is a progressive form of state intervention, aimed at nurturing

higher productivity and better access to resources (Meagher, 1995). Despite this positive outlook, the structuralist view was not without its critics. In fact,

some scholars have argued that the structuralists’ position is not that different from the

marginalists’ (Meagher, 1995). The main thrust of this critique is that informal economic

activity in developing countries – be it entrepreneurial or otherwise – is always

associated with marginal behaviour and the survival strategies of the poor (Fashoyin,

1993; Lubell, 1991; Nigam, 1987). Some go even further, asserting that there is very little

entrepreneurial dynamism in the informal sector. Far from being comprised of

independent entrepreneurs they argue, the sector is populated by unprotected workers

who are involved in survival activities and are often exploited by the formal sector with

the complicity of the state (Birkbeck, 1979; Lomnitz, 1982). Cross (1997) points out that

many of the people involved in the informal sector who are labelled independent or self-

employed are in fact dependent workers of companies or are linked to companies in the

formal sector and work on a commission or sub-contracting/outsourcing basis. At another level, those critical of the structuralist position argue that, in many

developing countries, state policies create environments that are conducive to the

emergence and expansion of exploitative types of informal sector employment (Leonard,

2000). The informal sector is seen as a by-product of the state’s inability to provide

adequate employment opportunities in the formal sector. Put another way, the existence

of the informal sector is the result of an oversupply of labour and a low demand for

unskilled or semi-skilled workers. It comes into being because developing economies are

unable to assimilate all of the available labour force, which compels the less fortunate

ones to find alternative ways of occupying themselves to avoid unemployment

(Connolly, 1985). As Weiss (1987) put it, informal economic activity usually arises from

the need for people to circumvent the inadequacies of the state to provide sufficient job

opportunities. According to this view, the economic activity seen in the informal sector of

developing countries is basically unemployment disguised as employment. Conse-

quently, real economic growth and poverty reduction/alleviation can only be achieved

by the implementation of macroeconomic policies designed to expand modern

sector employment and incomes and significantly reduce reliance on the informal sector

(Rakowski, 1994). At first sight, this debate seems to indicate a divergence of views. However, on closer

inspection, there is a convergence of marginalist and structuralist perspectives. Unlike

the structuralists, the marginalists do not deny the ‘survival’ nature and marginality of

current economic activity in the informal sector. In fact, the marginalists suggest that

informal economic activities may disappear if developing countries are able to move

from subsistence to capitalist, industrialized, modern economies. However, thus far, the

limited industrialization in SSA has not led to the development of large-scale, modern,

capitalist economies and so, from the marginalist perspective, the informal sector in SSA

still essentially provides only marginal jobs. Similarly, the structuralists, while extolling the economic potential of the informal

sector, concede that there is a need for state intervention if the sector is to realize its

economic potential. In effect, they are admitting that, where this does not occur, the

informal sector is unlikely to be a dynamic force of economic growth and development. If

we accept the convergence view of the informal sector – a view of the necessity of state

intervention to transform the sector from marginal and survival activities to an engine of

growth providing full-time employment and meaningful self-employment – then the

1068 The International Journal of Human Resource Management

question arises: can this be done and, if so, how can governments in SSA do this? Empirical research from Ghana will help us to explore these questions.

Research rationale and methodology

Ghana was selected as a case study for a number of reasons. First, Keith Hart chose Ghana as the setting for his original sociological/anthropological study of the informal sector and it made sense to revisit the country to assess developments 30 years on. Second, Ghana has a relatively well-developed informal sector, with heterogeneity evident across industry sectors and sub-sectors (Ninsin, 1991). This makes it particularly suitable for empirical study.

Third, Ghana was among the first of the SSA countries to follow the implementation of Structural Adjustment Programmes (SAPs) with a move towards democratic governance (Boafo-Arthur, 1999). With more and more SSA countries moving towards a system of multi-party democracy (Van de Walle, 2003; Wiseman, 1998) it was felt that the Ghanaian experience might offer useful insights to other democratizing nations looking to promote the informal sector. Arguably, Tanzania, Zambia, Uganda, Senegal, Kenya, Malawi and other SSA countries, that have experienced a massive retrenchment in public sector employment (Budhwar and Debrah, 2004; Muuka and Mwenda, 2004; Panford, 2001; Standing, 1999) in recent years as a result of the structural adjustment programmes (SAPs) are also facing challenges in finding employment for the retrenched.

Finally, as the majority of empirical research into the informal sector has so far concentrated on Latin America (see, Maloney, 2004), it was felt that the choice of Ghana (a country with well entrenched informal sector and traditional crafts and occupations) would help provide a new perspective. Focusing on an African country also seemed a good way of drawing HRM researchers’ attention to the unemployment/employment issues in Africa. The paper serves as a review of informal employment issues within a HRM context. In particular, it brings to the attention of HRM researchers the need for training and skills provision for informal sector workers, the role of environmental factors in shaping employment policies and the need to go beyond descriptive and prescriptive evidence/case studies or institutional reports to conduct analytical research from a HRM rather than economic development or anthropological perspective.

In view of the broad and exploratory nature of the research issues, it was decided that a qualitative approach, in the form of semi-structured interviews, was the best way to conduct the empirical research. The fieldwork was carried out in two phases. The first ran from December 2003 to February 2004; the second from November to December 2004. By using the purposive (judgement) sampling method, the researcher was able to identify organizations that were likely to provide information and shed light on the research questions. Within these organizations, individuals or groups who were expected to have useful insights were then selected and interviewed. Table 2 shows the relevant categories, the number and status of interviewees and the rationale behind their selection.

The data collected in the interviews were supported by information gathered from the available literature and from documents gathered during the fieldwork. The interview data and information were then analysed using the content analysis method. Next, the substantive points derived from the empirical fieldwork were categorized according to subject matter, as suggested by Gillham (2000). This was followed by the application of Miles and Huberman’s (1994) transcendental realism whose components of data reduction, data display and drawing of conclusions were applied to the content analysis. Following Punch (2005), all three components were interwoven and concurrently applied throughout the analysis of the research evidence.

Debrah: The informal sector as a source . . . developing countries 1069

Table 2 Categories and number of interviewees

Category Number of


Rationale for selecting the category

Senior officials of media organizations and the

organized labour movement

8 senior


To assess the contribution of the media and labour movements to democratic governance.

To examine how the media link up with organizations in civil society to highlight informal

economic activities, work and employment issues and unemployment problems.

To explore the impact of globalization, privatization and SAPs on workers, the informal

sector and employment issues.

To understand the labour movement’s perspective on issues relating to the increasing

growth of the informal sector and the government’s response to this growth.

11 major public service and policy institutions 16 senior


To shed light on the government’s efforts to make the informal sector the focus of job


To examine the role of the private sector in job creation.

To explore the impact of globalization and international competitiveness on private sector

firms, employment and the informal sector.

Major training institutions In total:

13 senior


30 current


21 graduate


To discuss issues relating to training for work in the informal sector.

To explore the role of training bodies in the STEP and PSI programmes.

To assess the highlights and pitfalls of training people for employment in the informal sector

and the difficulties, if any, in imparting entrepreneurial training to informal sector workers.

To learn from the perceptions and experiences of current and graduate trainees regarding the

STEP and PSI programmes, as well as employment issues in the informal sector –

including what hinders/facilitates the self-employed and entrepreneurs.

2 microfinance institutions 4 To shed light on the micro-finance industry in Ghana.

To shed light on the micro-finance aspects of the STEP and PSI programmes.

To gather views and ideas on the government’s attempts to use micro-finance to create

employment opportunities in the informal sector.

Total 92

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Background of empirical focus: the government’s informal sector employment strategy

Ghana made the transition from authoritarian military rule to multi-party politics in the early 1990s. The first multi-party parliamentary and presidential elections were held in 1992. The presidential election was won by the National Democratic Party (NDP), which had evolved from the military regime. However, the main opposition party – the New Patriotic Party (NPP) – complained that the Presidential election was not free and fair, and boycotted the subsequent parliamentary elections. In 1996, the NDC won both the presidential and parliamentary elections. The elections of 2000 were fiercely contested, with debate centred on issues such as which party could best tackle unemployment, create jobs and eradicate poverty. In the event, the opposition NPP succeeded in wresting power from the NDC.

Conscious of its campaign promise to reduce unemployment – and with an eye on winning future elections – the newly elected NPP government unveiled a two-pronged national strategy for job creation to tackle underemployment and unemployment. This strategy saw the establishment of Presidential Special Initiatives (PSIs) and help for the unemployed to gain marketable job skills – albeit skills which were mainly of use in the informal sector micro- and small-scale enterprises (NDPC, 2003).

The Presidential Special Initiatives are a key element in the government’s plans for poverty reduction through increased employment, business creation, export development and investment promotion. Under the schemes, the government identifies possible growth areas in the economy, then designates them as PSIs to create awareness and stimulate interest in potential business ventures. The objective is to promote both domestic investment (private enterprise) and foreign direct investment (FDI) as a way of generating growth and employment, mainly in the informal sector (MPSD, 2004). By encouraging people to participate in the PSIs, the government also hopes to stimulate long-term entrepreneurial development in the private sector.

PSIs have so far been declared in garments and textiles, salt making, cassava starch, and oil palm. The greatest success so far has been in textiles: several companies have already registered with the Ghana Free Zones Board and established garment-making factories to take advantage of the US government’s African Growth and Opportunities Act (AGOA), which facilitates access to American markets. The attainment of an AGOA visa in 2002 entitled Ghana to export textiles, apparel and 6,400 other products duty- and quota-free to US markets (ISSER, 2002). The cassava starch strategy focuses on creating demand for cassava to build up the industry and thereby create employment opportunities. Self-employed farmers are given loans to cultivate the product and supply the cassava starch factories. One such factory has been built at Bawjiase to process starch for export. In the case of oil palm, the government offers loans to self-employed farmers to purchase improved oil palm seeds for cultivation. The farmers then sell their products to factories that use palm oil as raw material. A similar policy is used to help entrepreneurs produce and export salt to Nigeria. As part of the PSI strategy, the government has also established programmes to help the unemployed gain the skills they needed to perform the newly created jobs.

Research findings

In 2001, Ghana embarked on an unprecedented exercise: a national registration of job seekers. As part of this process, the government conducted a survey designed to help them develop appropriate skills training and employment programmes. The survey asked the unemployed to indicate their educational attainments, skill acquisition preferences and

Debrah: The informal sector as a source . . . developing countries 1071

life aspirations. The aspirations expressed in Table 3 above helped the government to

design a skills intervention programme for the unemployed. With the support of the Ministry of Youth and Sports, the Ministry of Manpower

Development and Employment (MMDE) developed a Skills Training and Employment

Programme (STEP) to help the unemployed gain marketable skills. Although STEP does

not exclude the possibility of its trainees finding work in the formal sector, it is primarily

aimed at those who wish to be employed in the informal sector. At the end of 2003, about

3,500 people had received training under the STEP programme (ISSER, 2004). Table 4

shows the state intervention policies that are currently in place. For those with no more than a primary school education (who do not wish to

continue their schooling) and junior or senior secondary school (JSS/SSS) graduates

who lack marketable skills, the government offers key skills training in trades such as

Table 3 Aspirations of the registered unemployed

Aspiration Number

(a) Training for a specific skill/trade 74,100

(b) Apprenticeship or training attachment 61,000

(c) Help to set up own enterprise 321,200

(d) Participation in a current or future project (e.g. a PSI) 377,012

(e) Continuing general education 84,000

(f) Reintegration into family 1,000

(g) Other (e.g. financial support to set up a business) 25,000

Total 943,312

Source: Compiled from MMDE, 2001.

Table 4 Intervention policies

Aspiration Government’s response

Training for a specific skill/trade,

apprenticeship or training attachment

[Groups (a) and (b) of Table 3]

Providing training and helping trained people to set

up small but viable co-operative production units in the

informal sector

Help to set up own enterprise or



[Groups (c) and (g) of Table 3]

Offering training in entrepreneurial initiatives or

vocational occupations and facilitating access to

sources of micro-credit

Participation in a current or future


(e.g. a President’s Special Initiative)

[Group (d) of Table 3]

Encouraging people to seek the support of a District

Assembly or Rural Bank credit extension

programme to fund their participation

Continuing general education or

reintegration into family

[Groups (e) and (f) of Table 3]

Empowering ministries and other interested bodies to

address the educational needs of children under 14 by

encouraging and enabling them to attend school and

complete their Basic Education

Reforming and re-orientating Department of Social

Welfare Rehabilitation Centres towards providing

integrated training programmes for people with special

needs, including the disabled

Source: compiled from MMDE, 2001

1072 The International Journal of Human Resource Management

carpentry and joinery, building and construction, refrigeration and air conditioning, mechanical/auto/electrical repairs and metalwork, dressmaking, tailoring and hairdressing.

Another component of the intervention programme focuses on the provision of indigenous vocational skills. This component is targeted at unemployed people – regardless of their educational attainments – who want to start their own businesses. Indigenous vocational training is provided in handicraft vocations such as woodcarving, cane and basketwork, kente weaving, broadloom weaving, batik tie and dye, bead making, smock weaving, bamboo processing, and dressmaking; and in food processing activities, such as Shito (fried pepper/chilli powder preparation) and the production of indigenous bakery goods.

Other initiatives seek to equip those who wish to be involved in ongoing and future projects with the specific skills they need to make them employable in the PSIs. Currently, the focus is on garment manufacturing and the government has purchased the Volta Garment Factory as a base for the Clothing Technology and Training Centre, which will equip trainees with textile industry skills (ISSER, 2003).

Training is also being provided in vocational agriculture, which encompasses the cultivation and production of certain indigenous agricultural products. These programmes, which cover beekeeping, snail farming, grasscutter breeding, mushroom growing and indigenous leafy vegetable (ILV) farming, are designed to equip people with the skills they need to be successfully self-employed in the informal agricultural sector. Trainees learn how to produce the relevant products efficiently; how to set up a business; how to manage the business; and how to grow the business (CBUD, 2004). Once their training is complete, participants are encouraged to set up small but viable cooperative groups and practise their newly acquired skills. In terms of implementation of the STEP programme, the government has sub-contracted this training to existing vocational training providers, NGOs, private and public institutions, and religious organizations.

The interviews sought to discover the motivation behind the government’s informal sector employment strategy and to assess whether it is possible for the informal sector to provide productive and gainful employment. They revealed that, when the NPP government took power in 2001, tackling unemployment was one of its prime concerns. In the words of one public official:

The government needed to fulfil its election pledge of reducing unemployment by creating jobs.

But the state lacked the economic resources to create adequate jobs in the formal sector and FDI

had not created enough job opportunities. Hence, STEP was developed to equip the unemployed

with employable skills to take advantage of employment opportunities envisaged to be created

by the PSIs.

This is consistent with the view expressed by Botchie and Ahadzie (2004) that the STEP programme was implemented to fulfil electoral promises of the NPP government.

The government’s decision to focus on the informal sector as the primary source of employment was precipitated, to a large extent, by an unemployment rate of 11.2 per cent (or approximately one million people) (Ghana Statistical Service (GSS), 2002) and the inability of the public sector to absorb these people. The high level of unemployment was a consequence of slow economic growth, coupled with an expanding labour force. In short, annual economic growth averaging 4.7 per cent since 1984 had been insufficient to absorb a 5 per cent expansion of the labour force over the same period (i.e., up to 2000). Around 230,000 new job seekers were entering the labour market every year and just 2 per cent of them could be absorbed

Debrah: The informal sector as a source . . . developing countries 1073

by the formal sector (ISSER, 2004). Most new job seekers, therefore, had to turn to the informal sector but not all manage to find self-employment or employment with a ‘living wage’. This problem is not unique to Ghana: most of the workforce in SSA countries is now employed in the private sector as a result of the SAPs’ decimation of the public sector (Aryee, 2004; Standing, 1999).

In Ghana, only 8.8 per cent of the active workforce is employed in the public sector. The private sector provides employment for the remaining 91.2 per cent of the working population, with 80.4 per cent employed in the informal private sector. Of the economically active population, 65.7 per cent are self-employed sole traders; 5.1 per cent are self-employed with staff; and 14.7 per cent are unpaid family workers, apprentices, domestics/home-helps in the private informal sector (GSS, 2002). Armed with this information, the government decided that the best way to provide more and better employment opportunities was to develop the informal sector.

A recurrent theme of the interviews was the drive to make the informal sector a source of permanent employment. Without exception, the public officials interviewed linked the government’s focus on the informal sector to their policy of encouraging entrepreneurship and fostering the transition to a market economy. Interviewees stressed that encouraging economic dynamism and pushing job seekers towards the informal sector were in line with the government’s Golden Age of Business slogan, coined to help promote private sector growth and the development of an entrepreneurial culture in the country. It was believed that success in these areas depended on the government championing informal economic activities as worthwhile ventures. As another public official explained:

There was a need to urgently find ways to promote private enterprise, improve the image of the

informal sector as a source of employment and encourage those working in the sector to see their

employment or business venture in permanent rather than temporary terms. This was necessary

to disabuse the minds of people that only the formal sector could provide worthwhile


This is a clear indication that the government was extremely keen to enhance the image of the informal sector as a potential source of productive and gainful employment. The strategy was designed to challenge the underlying perception among policy makers in SSA – and among the unemployed themselves – that ‘proper’ employment meant a job with a wage or salary, working for someone else. In SSA, these perceptions have historically been a major influence on institutions that provide skills training. The result is that training programmes and curricula are biased towards preparing people for jobs in the formal sector. Since these jobs simply do not exist, there is a serious mismatch between the expectations and skills of job seekers on the one hand, and available job opportunities on the other (Kanyenze et al., 2000; UNECA, 2002). The focus on the informal sector was designed to change all of this.

With the implementation of STEP, the government signalled its intention to change the image of work and employment in the informal sector. One of the reasons the sector has a poor image in SSA countries is because skills acquisition and development is dominated by traditional apprenticeship training. In Ghana, Senegal, Benin and Cameroon, traditional/informal apprenticeships account for 80–90 per cent of basic skills training and there are few opportunities for trainees to upgrade their skills (Atchoarena and Delluc, 2001; Birks et al., 1994; Haan, 2001; Haan and Serriere, 2002). Apprenticeships in the informal sector do not offer adequate training in business skills, resource use, customer care, credit/financial awareness or business support. With STEP, the government was determined to overcome these shortcomings by integrating the

1074 The International Journal of Human Resource Management

informal and formal systems to produce a formalized and recognized system of training. As one of the public officials interviewed was quick to point out:

The STEP was introduced to shift the focus on vocational and other skills training from that

geared towards entering waged employment only to an emphasis on employment in either the

formal or the informal sector but with an informal sector self-employment bias. It is meant to

build on the strengths of the traditional/informal apprenticeship system by providing appropriate

skills and skills upgrading to enhance productivity, improve quality, and to acquire new

techniques and technologies as well as business, self-employment and entrepreneurial skills.

This shift in policy was designed to reflect the growing importance of the informal sector as an engine of growth and source of employment. More importantly, it was meant to challenge the assumption among policy makers in SSA that the main cause of unemployment was a shortage of particular artisanal skills such as carpentry, auto- mechanics and bricklaying (Kanyenze et al., 2000; UNECA, 2002). This assumption has often led to an unrestrained expansion of training programmes in certain trades. However, the attempt to combat unemployment with supply-driven training often ignores the demand for particular skills and the capacity of communities to make use of them. All too often, the result is market saturation. Indeed, in many African countries, training in certain skills is now almost a guarantee of unemployment (Kanyenze et al., 2000; UNECA, 2002). The strength of the Ghana government’s informal sector employment strategy was that it was based both on the declared aspirations of trainees and on a realistic assessment of available employment opportunities.

The strategy can also be seen as the first step in a process designed to document and formalize employment issues in the informal sector. This formalization process will help to ensure the development of an environment that is conducive to both employment and productivity growth. The government’s long-term aim is to equip informal sector workers with enhanced skills and create a workforce capable of producing a variety of high quality, innovative products and services that can compete with imported alternatives. This will stimulate demand for domestic products and services and thereby create more employment opportunities in the sector.

However, the trade union officials interviewed for this paper were doubtful about the ability of the informal sector to absorb significant numbers of unemployed people. Echoing Weiss (1987), Rakowski (1994) and Connolly (1985), they attributed the accelerating growth of the informal sector to an over supply of labour arising from population growth; low levels of literacy and general education; and the persistence of child labour in the country. A statistical analysis of these issues tends to support this view and demonstrates the extent of the challenge facing the government in Ghana and other SSA countries (Kanyenze et al., 2000).

Ghana’s population growth rate of 2.7 per cent means that, in common with most SSA countries, it has a very young population. In fact, 59.8 per cent of the population is under 25 years old, and 34.8 per cent of the country’s inhabitants are of working age (25–64). Only 5.4 per cent of Ghana’s people are over 64 (GSS, 2002). There is therefore an urgent need to create jobs. Unfortunately, as the trade union officials pointed out, the continuing decline of the formal sector makes it virtually impossible for the informal sector to absorb all the new entrants to the labour market.

Similarly sceptical views have emerged from academic studies into the capacity of the informal sector to provide adequate employment in SSA. Research evidence indicates that informal sector entrepreneurs and businesses provide relatively little in the way of paid employment to others, relying instead on unpaid apprentices and family members (Aryeetey, 1996). It has also been observed that informal sector enterprises exhibit little

Debrah: The informal sector as a source . . . developing countries 1075

consistent growth and tend to remain small throughout their lifetime. Consequently, some argue that the informal sector in SSA can only really support self-employment, in the form of income generating activities involving a single individual (Aryeetey et al., 1994).

This research evidence helps to explain why trade union officials feel the government’s employment policy is merely a product of political expediency and short-termism. In the union leaders’ view, the government is promoting informal sector employment as a safety net for the unemployed in the absence of proper welfare programmes. Furthermore, they contend that this is being done in a legislative vacuum, without due regard to health and safety or possible issues of exploitation.

The trade union officials also cited low levels of literacy and poor education as major constraints on the government’s attempts to tackle unemployment. This seems to be borne out by an analysis of the unemployment registration (survey) data. These data reveal that around 10 per cent of the registered unemployed had no education at all. The vast majority (82 per cent) were educated to either primary or JSS level. A further 6 per cent were educated to SSS level but had been unable to continue their studies or secure employment because they had failed the three subjects that are prerequisites for higher education and most jobs in the formal sector (English language, mathematics and a science subject). Only 2 per cent of the unemployed had received a college/tertiary or university education (MMDE, 2001).

Further analysis revealed that nearly 80 per cent of the registered unemployed had no employable (i.e. clerical, technical or artisanal) skills. This figure included around 120,000 displaced/homeless and unemployed young (under 25) people, who live, sleep and work on the streets. The remaining 20 per cent of the registered unemployed possessed some skills but needed retraining – especially in basic management and entrepreneurial skills – to enable them to take advantage of opportunities in the labour market or engage in entrepreneurial activities (MMDE, 2001).

The union officials emphasized that the poor educational standards of the registered unemployed merely reflected those of the population at large, where nearly half (45.9 per cent) of the adult population (15 years and over) is illiterate (defined as inability to read and write) (GSS, 2002: 7). The levels of educational attainment (3 years and over) in the general population are as follows: pre-school, 4.2 per cent; primary, 18.6 per cent; middle/JSS, 21.1 per cent; secondary/SSS, 6.0 per cent; vocational/technical, 2.2 per cent; post secondary, 1.5 per cent; tertiary, 2.8 per cent. Around half of Ghana’s citizens (43.4 per cent) have had no formal education at all (GSS, 2002: 8). And, as the interviewees pointed out, the education issue is compounded by the persistent problem of child labour.

In Ghana, the workforce is theoretically comprised of 15–64-year-olds. However, although it is illegal to employ anyone under 15 years old, statistics show that children aged between 7 and 14 constitute 8.3 per cent of the economically active population (GSS, 2002: 9). Child labour, usually motivated by poverty, is woven into the cultural, social and economic fabric of all SSA countries (Debrah, 2004). In Ghana, as in other SSA countries, child labour is on the rise as parents find it increasingly difficult to pay for their children’s education and the government lacks the means to enforce regulations around schooling and employment. Despite the fact that they are not well paid, children are often major contributors to family income and frequently drop out of school in order to support their families (GSS, 2003). As a result, many children do not acquire marketable skills and often find it difficult to develop entrepreneurial expertise.

In interview, the union officials argued that these issues highlighted the complexities and possible pitfalls involved in promoting the informal sector as a major source of

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employment in SSA. Their argument may have some merit. There is evidence from other SSA countries that, even in the informal sector, people with poor literacy skills face additional difficulties in finding work, becoming entrepreneurs or setting themselves up as self-employed. Poor education also impinges on trainability, hampering the absorption and retention of the knowledge necessary to build skills (Birks et al., 1994). Evidence from this study would seem to confirm such a hypothesis.

Staff interviewed at training institutions expressed similar views, as illustrated by the following comment:

One of key features of our training is awareness creation [about indigenous products] but the

main challenge we face is how to make the trainees understand what we are teaching. Because of

their low educational backgrounds and limited communication skills – most cannot read or

write and have limited scientific knowledge – imparting knowledge is a difficult exercise. We

cannot assume that because we are experts in our fields we can easily teach them to understand

the issues relating to the cultivation or production and marketing of the product. Rather, we have

had to develop particular ways of teaching.

In another session, one interviewee explained how they were tackling the issue:

We have found a way around this problem. We have realized that it is easier for illiterates and

people with low education to grasp and sustain knowledge and ideas imparted to them when we

design the courses at a very low level, using indigenous ideas, knowledge and technology. We

call this the ‘poor approach’, that is, using things that poor people are familiar with to teach

them. This implies adaptation and innovative use of low-tech equipment to demonstrate

concepts and ideas, and using interpreters where necessary.

Other trainers expressed similar views but added that the trainees’ limited education and poor literacy skills meant that even those who successfully completed the vocational training faced daunting challenges in putting the skills they had learned into practice, and many had difficulties in managing their businesses. As one interviewee commented:

Our association with the self-employed and entrepreneurs in the informal sector over the years

has made us aware of some of their shortcomings. In general, many have difficulties in

developing business strategies and business plans, and in making business decisions. Moreover,

they lack basic management and accounting knowledge. They often have no idea of the

difference between profit and capital, leading to the consumption of capital and the eventual

collapse of the business.

Although the training programmes are designed to help participants overcome these difficulties, both current and STEP graduate trainees commented on the problems, agreeing that business management was the subject they found hardest to understand. The interviewees stressed that if you have a poor educational background, you are ‘condemned to working in the informal sector’. It transpired that, with the exception of a single university graduate who had trained in batik making, almost none of the trainees were educated beyond SSS level. In fact, most had only JSS education. Some of these had completed their JSS as long ago as 1994 and had been employed in the housing corporation1 ever since.

Asked what they planned to do after graduation, over half of those taking part in the skills/trade apprenticeship programmes replied that they would look for paid employment in the formal sector. When asked why they did not want to become self- employed or work in the informal sector, they revealed that some of them had tried and failed to run their own business in the past. The reasons given for these failures included

Debrah: The informal sector as a source . . . developing countries 1077

a lack of adequate resources to secure premises or land; a shortage of contacts (networking skills) from whom to find work; the absence of a regular income; concerns over health and safety; and poor job security.

While all the trainees praised the courses, they also argued that the training did not provide adequate preparation for self-employment. The trainees did not blame the course content as such but stressed the difficulty of teaching skills and entrepreneurship at the same time. In their view, the entrepreneurship element of the course was overshadowed by the skills training part. The trainees also felt that they were not confident or experienced enough to manage a business.

However, their greatest problem was finding the money they needed to fund their training and set up a business after graduation. The STEP programme does not provide an allowance during training and many of the trainees indicated that, without the financial support of friends and relatives, it would have been impossible for them to continue the programme. The organizations subcontracted to provide training confirmed that lack of funding was the main reason students gave for dropping out of the programme. The providers acknowledged that some students had genuine financial difficulties, either because they had to travel a long way to the training centre or because they were former street children whose lack of accommodation exacerbated their money problems.

Graduates of the programme also complained that they had not been able to set up a business due to lack of capital. As they pointed out, the STEP programme did not originally offer financial backing (start-up capital) to help graduates start their own business. Consequently, more than two years after graduation, many were still unemployed. Following appeals to the government, it was agreed – three years after the inception of the programme – that each STEP participant should receive a seed corn loan. However, this money will only be disbursed by rural banks to applicants who form co-operatives. The graduates argued that there is no strategic link between the STEP programme and the rural banks and suggested that the government needed to establish a unit to coordinate the micro-finance aspects of STEP. There were also comments about the problems involved in forming co-operatives and organizing meetings. As one graduate grumbled:

for over two years we have wasted time and money chasing the ‘elusive’ loans. We make trips to

the rural banks with our own money but still do not know when the loans will be ready. We are

told by the bank that it is solidarity lending and therefore we need to form a cooperative. We

have done so and submitted the registration documents together with our training certificates to

the bank but we still have not got the money.

The interviewees went on to explain that many STEP graduates were frustrated and discouraged, doubting that they would ever get the opportunity to put the skills they had learned into practice. They were currently doing temporary jobs to make a living and keep body and soul together but as time passed, it looked increasingly unlikely that they would be able to set themselves up in business. It was pointed out that even if their money eventually came through, it would not be enough to fund a cooperative venture. At a conservative estimate, it would take 50 million cedis to start a business that could offer full-time employment to the ten members of a co-operative. However, the government is offering a maximum of 2.5 million cedis for each STEP graduate (Daily Graphic, 2004). As one interviewee lamented:

We may end up with loans that cannot set up businesses and we may have to settle for just

income-generation jobs instead of businesses that can provide a “living wage”.

1078 The International Journal of Human Resource Management

Even those who had been lucky enough to secure loans from friends and relatives had problems because their businesses were under-funded and forced to operate at a very low level. They were, therefore, unable to compete for large contracts and benefit from economies of scale. As such, they were struggling to break even and remain in business.

The study also attempted to discover why STEP graduates have struggled to obtain the promised government loans. Interviews with the managers of a participating rural bank revealed that the delays are due to a bureaucratic bottleneck. The government requires the banks to assess a co-operative’s work before it releases any money, but most cooperatives do not have any ongoing projects to assess because they have no money to set ventures up with. In the words of one manager:

It is a Catch 22 situation. The project managers need to know what the co-operatives are doing

before they can come up with a recommendation. The managers have to base the

recommendation on what they have seen. But if they have not seen any projects, how can a

recommendation be made that the money the cooperative has requested is adequate to support a

viable project?

The managers felt that this stalemate could be broken by getting rid of unnecessary bureaucratic procedures. In their view:

STEP is the government’s ‘baby’. Having been alerted to the problem that graduates cannot set

up a business without financial support, the government should think of setting them up initially

with a small amount [seed corn funding] before referring them to the micro-finance companies.

Some of the trainees and graduates were also unhappy with the idea that loans could only be accessed through co-operatives, citing concerns about working relations in co- operatives. Several felt uncomfortable about throwing in their lot with relative strangers – many of whom they had not even met before the start of the training programme. Under the ‘solidarity lending’ scheme, loans are not given to the co-operative as such but to individual projects. Each co-operative submits ten discrete projects and, once the loan is approved, the cash is divided between the individual members of the group. The bank does not insist that the business be a partnership, nor does it hold any particular individual responsible for repayment. Instead, the responsibility for repaying the loan rests entirely with the executive of the co-operative. The executive must then rely on peer pressure to ensure that each individual repays his or her loan – a strategy that does not always work. As some of the interviewees pointed out, the entire cooperative is blacklisted if even one member defaults on his or her repayments. The result is that cooperative members who may never have missed a payment are then prevented from borrowing the extra money they need to expand their businesses. It is a recipe for killing a business, they argue.

This study reveals that lack of capital is the primary barrier to entry for those attempting to start a business in one of the informal sector’s lucrative markets. As Haan and Serriere (2002) found, this inability to raise capital and mobilize resources goes a long way to explaining why many graduates of vocational training institutes in SSA do not succeed in starting their own businesses.

Similarly, Pedersen and McCormick (1999) argue that one of the biggest problems faced by self-employed people setting up businesses in the informal sector is a lack of access to formal financial institutions and the loans they offer. Tripp (1989) and Vandemoortele (1991) claim that this explains why the informal sector is generally able to provide only marginal and subsistence levels of employment to the poor and unemployed.

Evidence from the study indicates that, without adequate micro-finance support, the PSIs and the STEP programme will be unable to provide the majority of the jobless with anything more than income generating employment as own-account workers in

Debrah: The informal sector as a source . . . developing countries 1079

part-time, low paid, marginal and unsustainable economic activities. Hence, it can be argued that is spite of the implementation of the Ghana government’s strategy, the informal sector is still far from becoming a source of economic dynamism and entrepreneurship as advocated by the structuralists.


This paper has discussed the attempts of an SSA government to create gainful employment opportunities in the informal sector. In a sense, the study reveals that the marginalist view of the informal sector as providing marginal and survival jobs is true in the case of the STEP programme. Equally, there is some validity in the structuralist view that the informal sector has the potential to provide meaningful employment but the government’s informal sector strategy has not been coherent enough to tap this potential. The paper has shown through statistical evidence (e.g. high birth rate, low literacy rates, etc.) that the growth of the informal sector is the result of the state’s inability to expand the employment capacity of the formal sector. Arguably (and consistent with the structuralists view), in Ghana the lack of coherent state policies has contributed to the expansion of the informal sector. The research evidence also indicates that even with government intervention it is difficult, if not, impossible to avoid the informal sector remaining mainly as a source of marginal and survival employment because of the educational backgrounds and other characteristics of participants in the sector and their inability to mobilize capital.

The Ghanaian case reveals that the lack of a coherent informal sector employment policy contributed to the problems indicated by the STEP graduate trainees. This is consistent with the view articulated by ISSER (2004) that in Ghana, as in most developing countries, no single institution has overall responsibility for the sector. Many ministries have direct and indirect effects on the sector but their strategies tend to focus on the modern formal end of the small scale sector hence resulting in lack of focused and concentrated policy on the informal sector. This is the case in Kenya where in spite of the official support in the promotion of the informal sector there was no coherent policy for the sector for decades (King, 1996).

In the case of Ghana, the development of the STEP programme has been incremental instead of coherent or comprehensive from the onset. The STEP programme was not initially incorporated into any grand employment policy in Ghana. Similarly, it was not initially clearly linked to other existing vocational, job training and entrepreneurship development programmes (ISSER, 2004). However, there is now an attempt to develop an informal employment strategy as part of the Ghana Poverty Reduction Strategy (ILO, 2004).

Based on the empirical evidence, the paper argues that although the informal sector strategy is a product of political expediency and, therefore, prone to pitfalls, it nevertheless constitutes a worthwhile attempt to combat unemployment in the long term. The paper contends that in an era of economic liberalization and nascent democratic politics in SSA, governments must be seen to be tackling problems like unemployment. However, in an environment of perpetual economic crisis that undermines the ability of SSA governments to generate adequate growth, some argue that the aggressive promotion of the informal sector as the main source of work ignores the fact that it can provide the majority of the jobless with no more than marginal or subsistence-level employment.

As Pletcher (2000) observes, democratization (or political liberalization) in SSA countries has opened the doors of government to political pressures: opposition can no longer be suppressed nor discontent ignored. At the same time, democratization has allowed interest groups to become legitimate and push their agendas to the forefront of

1080 The International Journal of Human Resource Management

the political debate. In this setting, trade union leaders who are sceptical about the Ghana

government’s intentions can argue that its informal sector employment strategy is merely

an attempt to placate the unemployed and stave off political agitation or confrontation

with interest groups such as civil society organizations and organized labour. Such a view would be consistent with the accounts of van de Walle (1994), Widner

(1994) and Wiseman (1998) concerning the efforts of democratic governments in SSA to

move away from neopatrimonial allegiances and develop policies aimed at winning

votes. In the Ghanaian case though, the focus on the informal sector has highlighted the

complexity of the unemployment problem in developing countries and the need to adopt

a comprehensive approach to tackle it. Seen from this perspective, the development of an

employment strategy for the informal sector is an important objective and a necessary

component of any solution to the unemployment problem. The Ghanaian experience,

therefore, has useful lessons for other SSA countries. First, despite weaknesses in both its formulation and implementation, the mere

existence of Ghana’s informal sector employment strategy is recognition that concerted

government efforts are needed to tackle unemployment in SSA. The strategy symbolizes

a new era, in which the employment needs of the people can no longer be ignored. Second, the development of a policy, albeit an unsatisfactory one, makes it possible to

assess the strengths and weaknesses of the informal sector and initiate remedial action.

Seen from this perspective, the government’s strategy – while being no panacea for

unemployment – has at least opened up debate on how best to tackle the myriad causes

of unemployment in developing countries. Moreover, if we accept the marginalists’

contention that the informal sector is a transitory stage in economic development, lacking

the potential for independent growth, then the government’s employment strategy simply

represents a necessary intervention to promote growth in the sector. This is in line with

the structuralist perspective of the informal sector as an integral component or necessary

stage in the evolution of developing market economies – a new path to free enterprise

development. The structuralists would presumably applaud any efforts of developing-

country governments to encourage indigenous entrepreneurial dynamism and promote

the informal sector as an engine of economic growth. Third, the Ghanaian case highlights the need to take a holistic approach to combating

unemployment. As the study reveals, SSA countries cannot rely just on training and a

revitalized informal sector to cure the problem of unemployment. Any meaningful

employment strategy must deal with macroeconomic as well as social, cultural and

political factors. Among the issues that need to be addressed are: literacy, education

and skills training; population growth; rural–urban migration; the problem of displaced

children, street children and working children (and the enforcement of legislation on

school attendance and child labour); the provision of effective business and skills

training; and concerns about job/employment insecurity. Governments need to adopt a concerted approach to tackle these issues. As in the case of

Ghana, this will involve a new style of government in which ministries with responsibility

for women, education, youth, employment, training and development, welfare and social

security are empowered to work with each other and with NGOs, religious bodies and the

private sector. This is one of the effective ways to tackle unemployment in the short-term

and develop policies and strategies aimed at minimizing unemployment in the long-term. It is hoped that this paper will create sufficient interest to generate further rigorous

academic research into informal sector employment in developing countries (particularly

in Africa).

Debrah: The informal sector as a source . . . developing countries 1081


The author is extremely grateful to all those who participated in the study. But, I would like to express my special thanks to Mr Kwabena Darfoor – Executive Director of GRATIS Foundation for his help with this research. Also, I owe a debt of gratitude to Nana Frankie Asare-Donkoh – former Deputy General Secretary of the Ghana Journalist Association – for introducing me to some of the organizations that participated in the study.


1 Asked what they were doing before joining the STEP programme, they replied that they were

employed in the ‘housing corporation’, i.e. idling at home – a euphemism for being unemployed.


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