The truth about Africa’s rising middle class Income growth in Africa

may not be as fast as some have expected, but the trend is very much alive

Opinion on Africa’s middle class opportunity is divided. When Nestle earlier this year announced its disappointment with the scale and growth of Africa’s middle class, and cut its regional workforce by 15 per cent, the news dominated headlines. Only a few months later, AB InBev’s takeover of SAB-Miller – one of the largest proposed corporate takeovers ever of a UK-listed entity – was motivated in large part by SAB-Miller’s proven growth markets in Africa.  (Photo: Razia Khan, Chief Economist for Africa – Standard Chartered Bank)

‘Middle class’ households are typically defined as those that spend at least half of their income on goods and services beyond just food and basic necessities. The emergence of this ‘consumer class’ helps to propel growth to the next level. Buoyed by supportive demographics, a rising middle class will mean that demand grows, businesses prosper, employment increases and economies flourish. It’s a virtuous cycle.

Traditionally, the ‘middle class’ has also played an important role in political developments. In Sub-Saharan Africa, the rise of multi-party politics in the 1990s, with calls for greater accountability, was often closely correlated with improved economic management and faster growth.

Newly-democratic South Africa would see an impressive emergence of a middle class, even against a sometimes-disappointing overall growth backdrop. According to the Unilever Institute, even a decade after the end of apartheid, South Africa’s middle class grew by c. 250% (between 2004 and 2012). By the eve of the global financial crisis, South Africa’s new ‘black’ middle class exceeded its more-traditionally ‘white’ middle class in terms of spending power. Despite weak overall growth, the new middle class has made continued gains since then.

South Africa’s progress – with its well-developed retail and financial sectors – is well-documented. But accurate measurement of the rising middle class has been more problematic elsewhere. Just how developed is Africa’s middle class? Different studies have offered very different interpretations.

An African Development Bank Study from 2011 attempted to generate a definition of middle class more suited to local conditions in Africa. Somewhat controversially, it defined middle class as those living on $2-20 international dollars (purchasing power parity-adjusted) a day. This included the so-called ‘floating middle’ – households living on $2-$4/day, who might be knocked back into poverty in the event of a severe economic shock. The AfDB study, using this definition, suggested that roughly one-third of Africa’s population was middle class.

However, another study, published by Pew Research Center this year – using the narrower, and more internationally accepted definition of middle class (incomes of $10/day or more) – suggested that only 6 per cent of Africa’s population could be classified as middle income. The Pew study implied that while African economies had made great strides in lifting many millions of households out of poverty in the recent past, many had not yet made it to the middle-income level. In Nigeria, according to Pew, the share of the poor fell 18 percentage points between 2001 and 2011. But while the share of low income earners grew 17ppts, the share of middle income earners rose only 1 ppt over this time. Similar results held for Ethiopia, which had seen an even greater share of its population lifted out of poverty. The share of the poor in the total population fell by 27 ppts in Ethiopia. As in Nigeria, the share of middle income earners increased just 1 ppt.

Should we be concerned?

Africa’s recent experience does not necessarily set it apart from other developing regions. Even in Asia three or four decades ago, the large majority of people lifted out of poverty remained on low incomes – for a while at least. Development does not stop there.

The ability to earn a steady income is now increasingly recognised as the one factor that distinguishes those living in poverty from those able to emerge as middle-income earners.

Consequently, the focus of debate has correctly turned to whether the conducive employment opportunities are being generated in Africa to ensure growing income levels.

Sub-Saharan African economies with their more chequered histories – often marred by dependence on a single commodity – have seen much more volatile growth paths than elsewhere. In the past, this may have been a factor holding back the emergence of Africa’s middle class.

While the recent decline in poverty is encouraging, to build further on the progress so far, the policy prescriptions for Africa’s economies are also clear. Anything that can be done to reduce the volatility of growth, and in particular, the volatility of employment, should be put in place. There is an important role for counter-cyclical policy.

Given that Africa, with its favourable demographics, represents one of the best counter-weights to the secular stagnation that threatens developed economies, perhaps the region’s needs deserve an even greater policy focus on a global level.

What does Africa need to lessen the volatility of outcomes? It needs more investment, more consistency of capital inflows, especially counter-cyclical flows, and more democracy, with greater progress in improving governance. There are no short-cuts to future prosperity. Recent regional trends that have narrowed the space for civil society risk undoing a lot of the progress already made.

Important foundations for the emergence of Africa’s middle class have already been put in place with its success in poverty alleviation. It is in the ultimate interest of the global economy that this progress is built upon.

Razia Khan, Chief Economist for Africa – Standard Chartered Bank

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