Africa’s Aggregate Demand Problem

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This article first appeared in my weekly column with the Business Daily on March 10, 2019

One reality of those who live in Kenya and Africa more broadly is how vibrant the entrepreneurship space is, and the growing amount of support targeting the African startup ecosystem. Indeed, a venture investment report indicates that there was almost a four-fold increase in total startup funding received for African startups in 2018. The number of funding deals more than doubled and African startups raised a record USD 725.6 million last year. This of course is good news for many businesses in Africa for whom a lack of finance as key constraint to development and growth. However, while the trend in financing is encouraging there is a broader question as to whether all these startups will be able to scale and grow, given aggregate demand issues in Africa.

Aggregate demand is the total demand for goods and services within a particular market. Brookings Institution states that with regards to Africa, while African economies have improved their general macroeconomic conditions and performance, the continent is not creating enough wealth and jobs at a pace that can make significant inroads into sustainably and substantially reducing poverty. That said, if you look at growth in GDP per capita, this stood at about USD 1,574 in Africa in 2017, and grew at about 1.85 percent between 2000-2017. This means not only are there more African consumers, the income available for each African to buy goods and services is also slowly growing. The combination of a growth in population and a growth in GDP per capita makes Africa a fast growing market, in principle.

Image result for Africa market


However, there are two key factors that affect the strength of an increase in GDP per capita on a growth in an ability to consume and therefore lived aggregate demand. The first is inequality; and here Africa has serious problems. The UNDP points out that 10 of the 19 most unequal countries globally are in Sub Saharan Africa. Thus, although incomes may be growing as a whole in Africa, far too many still live in poverty and often cannot afford basic goods and services. As a result, businesses in Africa are fighting for a fairly limited number of Africans to buy goods and services; and this competition for African pockets will invariably inform the ability of thousands of startups in Africa to scale and grow.

Secondly is that fact most African countries have no social safety net. The aggregate demand that could be generated by incomes of those with stable and regular income, the African middle class, is diluted by meeting the basic needs of loved ones in poverty and low income bands. Thus, while the African middle class may have the propensity to consume, the reality is that their spending decisions are informed by meeting the needs of others, as they are the social safety net for millions of Africans. This then raises questions as to how the African middle class balance the diversion of income from what they view as important support to others, with directing that spending to new goods and services offered by startups.

Image result for Africa middle class mall


In short, Africa is a growing market, but there are structural issues with regards to whether incomes translate to new purchases given the structural features of the continent’s economy. It is important that new entrants into Africa, are clear as to which income segment is their target segment, and the extent to which inequality and strained middle class pockets will inform the uptake on new goods and services

Anzetse Were is a development economist

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