The Middle Class in Africa: Fact or Fiction?

Article published in This is Africa on 25th July 2016

Also published in the Centre for African Studies, Nanyang Technological University, Singapore, on the 26th July 2016

“The most perfect political community is one in which the middle class is in control, and outnumbers both of the other classes.”

This quote from Aristotle could not be more true in our modern society. A society with a strong middle class and a small gap between rich and poor is more likely to experience economic growth[1]. Inequality negatively affects societies because the poor are less able to invest in their education, are more likely to suffer poor health and, as a result, will have lower productivity.

On the other hand, according to controversial former American Secretary of Labor Robert Reich, the very rich do not spend or generate jobs proportionally to their wealth[2]. The wheel of economy does not spin because of the poor or the rich, it turns on the strength of the middle class.

The Middle Class in Africa

In 2014, the World Bank estimated that 55.3% of Sub-Saharan Africans from developing countries were living in slums[3]. In spite of this sad reality, the robust economic growth seen in the past decades in Africa improved the situation of the extremely poor. In 1990, it was estimated that 56.8% of the population of the developing countries in Sub-Saharan Africa lived on less than US$ 1.90 per day[4]. This percentage dropped to 42.7% in 2012. For this share of the population, discretionary income is a dream and money is spent on the most basic of the needs: obtaining food.

Middle Class in Absolute Terms

A study conducted by the African Development Bank (AfDB) in 2011 is still a reference for analysis of how the middle class in Africa is evolving. The study considered a “floating class”, with daily income between US$ 2 and US$ 4. This class is vulnerable and unstable and individuals in this category could slip into absolute poverty through the slightest change in their economic situation. A stable middle class would be constituted by the share of population earning between US$ 4 and US$ 20 per day. However, it is questionable whether one can be considered middle class earning less than US$ 10 daily. A person living in such a tight budget will likely not have any discretionary money left at the end of the day and this is one of factors that classifies a middle class income earner.

In spite of other classifications for what middle class constitutes, through the definition above, it was showed that from 1990 to 2010 there was a gain in economic power that brought more than 125 million people in the continent from extreme poverty to a “floating middle class” status. However, in the same period, only an additional 44 million people managed to reach the “stable middle class”. In percentage terms, the size of this “stable middle class” barely changed from 1990 to 2010. It actually went down, from 14.35% to 13.44% of the continent’s population. In 2010, there were 128 million people in the “stable middle class” category in Africa and near 200 million in the “floating middle class” group.[5]

Middle Class as a Concept

The size of the middle class in Africa also depends on how this segment is defined. A more widely accepted understanding considers that individuals of this class should have at least a third of their income available for non-essential goods and services, meaning they would have a third of their salary free to be spent on goods and services beyond food and basic necessities. This concept of middle class is strict and would place very few Africans in the category. Although sales of refrigerators, television sets, mobile phones, motors and automobiles have increased in most of African country in recent years, this growth comes from a small baseline and the majority of the population still do not have access to these goods.

Middle Class in Relative Terms

Middle class can also be defined in relative terms. The middle class could be understood as individuals or households that fall between the 20th and 80th percentile of the consumption distribution or between 0.75 and 1.25 times median per capita income, respectively[6]. Depending on the definition, the size of the middle class in Africa can range from 300 to 500 million people, representing the population that is between Africa’s vast poor and the continent’s few riches. This figure, on the average, equals to the size of the middle class in China[7] and India[8] together.

Middle Class in terms of Wealth Accumulation

In 2015, Credit Suisse conducted a study to estimate the size of the middle class globally. Differently from the African Development Bank (AfDB) report[9], from 2011, and from other researches[10], middle class was defined in a broader way, considering assets and wealth accumulation rather than just income alone. This means that an economic shock, like a loss of income stream, would not affect immediately the household status. The values and aspirations of the middle class have always been linked to ownership of property, which gives this class a stake in the future of the country, and the freedom to view issues from a longer term perspective.

Credit Suisse’s methodology considered middle class those who own between US$ 50,000 and US$ 500,000 in wealth, for individuals living in the United States. For other countries, the IMF series of purchasing power parity (PPP) values was used to derive middle class wealth bounds equivalent in local purchasing power terms. For example, Nigeria and South Africa had their lower bounds at US$ 21,725 and US$ 22,696, respectively.  The lower bound figures were set as a wealth large enough to provide substantial protection against work interruptions, income shortfalls, or emergency expenditures.

According to Credit Suisse, globally, the number of middle class adults jumped from 524 million in 2000 to 664 million in 2015, an increase of 140 million or 27%. Africa stays far behind. The size of its middle class in 2000 was 18.4 million people and, from that time until 2015, this segment increased by discreet 400,000 individuals only. Currently, only 3.3% of the African population could be classified as middle class through this methodology. These individuals accumulate 32.1% of the total wealth in the African continent, or US$ 834 billion. In global terms, however, this corresponds to only 0.3% of the total global wealth[11].

The Evolution of the Middle Class

The middle class in the more advanced industrializing economies of Western Europe and North America was, for most of the 20th century, much larger than that in the colonies and other developing countries, where large proportions of the workforce had low levels of education and worked in agriculture.

In the early stages of industrialization opportunities were created by a fast growing economy. Attracted by higher salaries and more employment opportunities, farmers leave the agricultural sector and move to the industry. The manufacturing segment starts competing in the international market as the cheap labour employed by the industries of these developing countries can produce at a lower cost than that of more advanced economies. This industry growth propels a vast amount of the population from its previously rural and poor social strata to an urban middle class. Eventually this results in a decrease of income inequalities because the new middle class sits somewhere between the rich elite and the rural poor. The surge across the poverty line is a period of accelerating growth both for the new middle class and for the country it inhabits. That should continue for a couple of decades.

After this first boom, upward social mobility becomes intertwined with the level of education of a population. As industrialization rates reach a plateau, competition rises and workers require increasing levels of education and specialized skills to ascend in the work place. At this point the size of the middle class becomes strongly correlated with educational attainment levels, mainly tertiary education[12].

The ability to earn a steady income is increasingly recognised as the one factor that separates those living in poverty from those able to emerge as middle-income earners. A steady income, even if not high, is part of how people plan their future, how they are able to make savings and invest in their skills. The inability to keep a secure job is highly correlated to poverty. As people lose their jobs they will rely on their own savings or government aide. Hence, for a majority of the population who is in the threshold between middle class and poverty, government safety nets are very important. A broad welfare system should include subsidised or free health care, education, unemployed benefit, public transport, retirement benefits and homeless shelter. Countries with large welfare state systems in place and low levels of inequality tend to experience an increase in the size and income shares of their middle-income group.

A global study conducted by the Wolfensohn Center for Development at Brookings, a non-profit organization devoted to independent research and policy solutions, considered middle class as those households with daily expenditures between US$ 10 and US$ 100 per person in purchasing power parity terms. This research calculated that, in 2010, about 1.8 billion people in the world are middle class, or 28% of the global population. The number of people earning below the lower threshold and, by the definition, considered poor, summed 70% of the global population.

The research shows that this scenario changes significantly over the coming years. By 2022, the number of people in the middle class will surpass those in poverty and, by 2030, 5 billion people, or nearly two thirds of global population could be considered middle class[13]. By that time, Asia will host 64% of the global middle class and account for over 40% of global middle-class consumption. China, India, Indonesia, Vietnam, Thailand and Malaysia will be the main drivers of this trend in the East[14].

The Problem with the Top Richest

Widening income disparities is a defining challenge in the modern world. Inequality can be a signal of lack of income mobility and opportunity, a reflection of persistent disadvantage for particular segments of the society. Widening inequality also has significant implications for growth and macroeconomic stability, it can concentrate political and decision making power in the hands of a few, lead to a suboptimal use of human resources, cause investment-reducing political and economic instability, and raise crisis risk.

Increasing concentration of incomes can also reduce aggregate demand and undermine growth, because the wealthy spend a lower fraction of their incomes than middle and lower-income groups. The IMF conducted a study on a large sample of advanced economies where it estimated that a one percentage point increase in the income share of the top 20% highest income earners actually drags down GDP growth by 0.08 percentage points over a period of five years, while a rise in the income share of the bottom 20% (the poor) is associated with 0.38 percentage point higher growth[15].

The top richest segment also enjoys advantages that are not accessible to the middle class income earners and below. These benefits contribute to increasing wealth accumulation and growing income disparities. The top richest have access to more open capital markets, which enhance opportunities for high returns, while in developing countries, shallow financial sectors and underdeveloped capital markets may be limiting investment opportunities for small savers and borrowers. Besides the fact that in many countries income tax breaks are not proportional to the income, the rich also make use of several manoeuvres that prevent them of paying fully their taxes. These gimmicks include access to tax heavens, use of shell companies, avoid capital gains taxes, use of shell trust funds, etc[16].

The inequality between poor and rich has been exacerbated in the last decades. Corporate profits have been translated into strikingly high executive salaries and bonuses, a pattern that is observed across both advanced and large emerging market economies. In China, for example, more than one-third of all wealth is concentrated in the top 1 percent, while the majority of the population remains poor despite strong economic growth[17]. In the US, also 1 percent of the population holds a third of the total wealth (see chart below).

Estimates suggest that almost half of the world’s wealth is now owned by just 1 percent of the population, amounting to US$110 trillion, 65 times the total wealth of the bottom half of the world’s population[18].

graph1.png

 Fighting Inequality

Creating a strong middle class and allowing opportunities for the poor to climb the social economic ladder is a challenge that will require more equitable distribution of income. The government has a central role in this process through investing public revenue in basic services and economic infrastructure that offer the poor people greater opportunities; through focusing on education and teaching skills that would enable the creation of more stable jobs for the poorer segments, which would allow them a path out of poverty; and through the creation of safety nets that would protect the most vulnerable segments of the population when facing struggles such as unemployment, retirement, disability and parenthood.

Heavily taxing the rich and distributing this revenue to the lower social segments of the population is also a sure strategy that leads to a decrease in inequality.

Investments focused in Africa’s Middle Class

The growth of a middle class is usually associated with better governance. It fosters an increasing demand for government accountability, property rights and a higher quantity and quality of public services. A rising middle class is directly related to increasing investments, job creation and overall development. As the basic needs of this class are satisfied and there is a surplus income that can be spent on non-essential items, a demand for diversified and more value added goods is created. This virtuous cycle was observed in Asia and in some parts of Latin America in the past decades. Now, it is time for Africa.

Africa’s middle class is strongest in countries that have a robust and growing private sector as many middle class individuals tend to be local entrepreneurs. Additional to that, the middle class helps to foster private sector growth as it offers a key source of demand for goods and services supplied by private businesses.

Although conclusions on the size and growth of an African middle class vary a lot depending on how this segment is defined, many companies bet that the future will be brighter than the present. Navigating through unexplored territory, these companies only thrived after many setbacks and experimentation.

Aluzinc Asia is a Singapore-based global company that trades building and industrial raw materials. The company has a strong presence in the African continent, where it grossed US$ 48 million in sales in 2015. Navin Ravindran, Vice President for Sales, is very optimistic on the business potential in Africa: “We have the vision to develop the African business to US$ 100 million in the coming three.”

But behind all the potential Africa holds, there are still many issues that have to be overcome. According to Ravindran, Aluzinc faces many challenges in its quest to grow in Africa: “Credit worthiness of the customers; poor infrastructure facilities; no defined product standards for specifications, quality and performance in most importing countries; and the high cost of financing.”

On the vision whether a booming middle class in Africa is a mirage or a reality, he adds: “Opinions on Africa’s middle class opportunity are divided”. For him there are many struggles undermining a long-term and steady growth of the middle class in Africa: “The rate new jobs are created is very volatile and there is a lack of genuine efforts from the government to uplift people from below the poverty line.”

Michael Bridger, Divisional Foods Manager in Massmart has a similar opinion: “It [the growth of a middle class in Africa] is real, but slower than originally anticipated; various African country laws and prohibitive business conditions make it difficult to gain momentum.” Acquired by Walmart in 2011, Massmart is a well-established and major South African distributor of consumer goods in Africa. The company is one of the largest retailers of general merchandise, liquor and home improvement equipment, and wholesaler of basic foods.

Vega Foods is a Singaporean company that produces good quality canned food, edible oils, dairy products, sauces, dressings and soya products, at low price points. The company is almost exclusively focused on the African market, having settled there 15 years ago. At that time there were only a few players in the food industry in the continent and they were not targeting the low middle class. “When we decided to look into Africa, we thought: someone has to change the game field. Let’s give the less fortunate something that will make them feel that it’s not only the upper class who enjoys a better product”, Vikramm Chand, CEO of Vega Foods, says. “We don’t manufacture a product for Africa, we manufacture an international product that is affordable in Africa, but at the same time, for its quality, it could be sold anywhere else in the world”.

For Chand, Africa in fact holds a middle class, but a struggling one: “Middle class in Africa is very different. When you come down to Sub-Sahara Africa, which is where we concentrate, the middle class is just a threshold above the mass market”. And the challenges of this emerging market are tough: “Currencies are very weak, there is ample corruption, and unstable governments. We are well established there, but new entrants will face a choppy and slow growth. What we are doing now is to create structure in a non-structured environment, but that’s not easy”.

Elizabeth Arden (EA) is a global cosmetics company that entered the African market in 2009. The company has its Sub-Saharan headquarters located in South Africa and sells a broad selection of fragrances and skincare products. “We want to attract young consumers who aspire to become middle class income and above. They end up becoming loyal consumers of the EA brand for many years to come”, says Corne Nel, Managing Director for South Africa. The company has a wide portfolio that encompasses consumers of various income classes. Nel recognises there is certainly a growing and untapped middle class that is keen to buy EA’s brands: “The beauty industry is still very underdeveloped. The Sub-Saharan business has seen a significantly faster growth than that experienced in the South African business over the last few years. These are very much developing economies and we see growth of up to 35%.”

MD Ramesh, President for South and East Africa at Olam International, like Corne Nel, has a positive view of the growth of the middle class in Africa: “Yes, there is certainly a growing middle class. We have seen a shift in consumers’ habits. Consumption of packaged food, which is convenience-oriented, has grown. This is an indication of larger disposal income and an indication of social ascending.”

Olam was established in 1989 in Nigeria and later, in 1995, incorporated as a public limited company in Singapore. The company has a long-term relationship with Africa, dealing with the sourcing, processing and distribution of raw materials such as cocoa, sugar, beans, palm oil, and nuts, and is the world’s biggest supplier of cashews and sesame seeds. Africa plays an important role in the company’s portfolio: 27% of total sourcing volume comes from Africa, where 29% of sales turnover is generated.

Olam not only produces in Africa. The company has Africa as one of its main consumers. “Olam is the largest rice farm owner in Nigeria and all the rice produced there is sold domestically. Olam has probably the largest palm oil plantation in Gabon. It will start producing in the next two to three years and all of it will be sold in Africa”, says MD Ramesh, President for South and East Africa at Olam International.

The company targets the middle class and upper middle class looking for convenience when cooking. “Olam imports about 1 million tonne of wheat, which is used to produce pasta and biscuits. All the manufacturing processes take place in Africa. Olam also imports tomato paste concentrate and reformulates it according to the consumer’s taste in Nigeria and Ghana. The products are branded and distributed across the continent”, adds Ramesh.

The middle class holds the future of Africa, it is vital to the continent’s economic and political development and essential for the growth of democracy. Creating opportunities for growth of the middle class should be of primary interest to the policy makers. By distributing income in a more equitable manner and through a broader and inclusive education system, governments can bring the poor up towards a middle class level.

A strong middle class creates demand, which generates employment opportunities in a wide variety of areas. The need for higher skilled workers arises and, with them, comes a demand for better education. More jobs and better education result in economic growth, propelling the less fortunate to a higher economic and social status. It is a virtuous cycle. The inevitability of growth brought by a strong middle class is brilliantly captured by this Karl Marx quote: “The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian nations, into civilization”.

The author, Otavio Veras, is a Research Associate of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. Otavio can be reached at overas@ntu.edu.sg.  

[1] Redistribution, Inequality, and Growth (IMF, Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, Feb 2014)

[2] Inequality for All (Book and documentary by Robert B. Reich, Sep 2013)

[3] Population living in slums (World Bank), where individuals living under the same roof lack one or more of the following conditions: access to improved water, access to improved sanitation, sufficient living area, and durability of housing

[4] Population living on less than $1.90 a day at 2011 international prices (World Bank)

[5] The Middle of the Pyramid: Dynamics of the Middle Class in Africa (AfDB, Apr 2011)

[6] Stuck In The Tunnel: Is Globalization Muddling The Middle Class? (Center on Social and Economic Dynamics, Aug 2000)

[7] Mapping China’s middle class (McKinsey Quarterly, Jun 2013)

[8] India’s middle class population to touch 267 million in 5 yrs (The Economic Times, Feb 2011)

[9] The Middle of the Pyramid: Dynamics of the Middle Class in Africa (AfDB, Apr 2011)

[10] Rise of the middle class in sub-Saharan Africa (Standard Bank, Aug 2014)

[11] Global Wealth Databook 2015 (Credit Suisse Research Institute, Oct 2015)

[12] The Middle of the Pyramid: Dynamics of the Middle Class in Africa (AfDB, Apr 2011)

[13] The New Global Middle Class: A Cross-Over from West to East (Wolfensohn Center for Development at Brookings (2010)

[14] The Swelling Middle (Reuters, 2012)

[15] Causes and Consequences of Income Inequality: A Global Perspective (IMF, Jun 2015)

[16] Accounting Tricks the 1% Use to Dodge the Taxman

[17] The Wealthy Get Wealthier (Beijing Review, Oct 2014)

[18] Working for the Few, Political capture and economic inequality (Oxfan, Jan 2014)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s