Thursday, March 26, 2015

That Elusive African Middle-Class

“Middle class” is such a vague term, and socialists tend to say “middle-income working class” but it is such a chore of having to correct and amend so many sources that use the phrase “middle class” we often let it pass.

Everyone wants to know if the continent is better off, but proclaiming that it is without solid proof. The “middle class” in Africa is growing. That much we know. But depending on who you speak to you and how you measure it, you can get a very different picture of its size. It makes a huge difference, for example, if you decide that people with incomes above $2 or $4 a day are part of the middle class.

Some 791 million Africans live in homes with at least one mobile phone, and 495 million in homes with a television. About 311 million have a refrigerator and 114 million live in homes with a car. It is estimated 38 million Nigerians have incomes above $2 a day. Almost 90 million Nigerians live in homes with a television. In Tanzania and Mozambique, the number of households with electricity has more than doubled in the past five years. So things are changing.

The African Development Bank defined the middle class as those with a daily consumption of US$2-$20.within its middle class. On that basis, 34% of Africa’s 1.1 billion people are middle class. But are they really middle class? Many commentators have, however, conveniently ignored the fact that the AfDB divided this group into a further three sub-categories. At the bottom end is what the AfDB calls the “floating class”. These people spend just $2-$4 a day, and account for 60% of the “middle class”. Many Africans seen as “middle class” are in fact highly vulnerable to various economic shocks and can easily lose their middle-income status.

A report authored by Standard Bank economist Simon Freemantle suggests the region’s middle class is smaller than formerly believed. His report looks at 11 sub-Saharan African countries which, combined, account for half of Africa’s GDP: Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Sudan, Sudan, Tanzania, Uganda and Zambia. The report found that in these 11 markets, there are 15m middle-class households, up from 4.6m in 2000. Some 86% of households in the 11 countries remain in the low-income band, although this figure is expected to improve, falling to 75% by 2030. The vast majority of Africans continue to live on or below the poverty line (measured as those with daily income of $2 or less. There is however differences between countries. In Ethiopia, for example, some 88% of the country’s 90m population live on $2 or less per day; while in Angola ‘only’ 54% fall within this category. In 1990, 90% of Nigerians lived on or below the poverty line. This figure has since dropped to 65%. Nigeria’s middle class currently stands at just over 8m households, and by 2030 Africa’s largest economy is anticipated to have 21m middle-class households.

“Though there has been a meaningful individual lift in income, it is clear that a substantial majority of individuals in most countries we looked at still live on, or below, the poverty line (measured as those with a daily income of $2 or less),” explains Freemantle.

The size of Africa’s middle class stretches from as few as 15.7m households, as estimated by McKinsey, to the 327m people the AfDB assessed in 2010. Completely different monetary definitions of the middle class drive these differences. The AfDB’s bottom threshold of $2 per day is much lower than McKinsey’s $55, Standard Bank’s $23 or the $10 per day used by the OECD, a Paris-based intergovernmental think-tank. In addition, the OECD and AfDB report their statistics in total number of people, while McKinsey and Standard Bank report on households without specifying their size.
It may appear puzzling that Standard Bank defines the middle class as households that spend between $8,500 and $42,000, while McKinsey’s 2010 Lions on the move report defines this group as households that spend above $20,000 a year. This can be reconciled: McKinsey includes all households above $20,000 in disposable income. This means that they also count very rich households, which explains why their estimate is higher.
In its other report, The rise of the African consumer, McKinsey contends that 40% of spending-power growth will come from households that earn above $20,000 annually. They note that “this group currently accounts for just 1-2% of total households” but that this income cluster is “growing faster than the overall average, both in numbers and in average income”.
So what are we left with? We went from a middle class that represents 34% of Africa’s population to one that represents 1-2%. But this tiny group is not middle class: they are very rich households that have the fastest-growing incomes. Ultimately, what we are seeing is not a pyramid bulging in the middle as in the picture drawn by the AfDB. The numbers from McKinsey and Standard Bank describe a society where the top spenders are getting richer. This may be good news for some banks and investors, but it does not carry the same connotations for social scientists. A fact-based outlook, however, is the best path. Does Africa’s population really have more spending power? Are fewer Africans hungry?

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