aggregate demand

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

(source: http://www.travelstart.co.ke/blog/15-street-markets-must-visit-africa/)

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

(source: https://foreignpolicy.com/2011/05/06/middle-class-africa/)

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

Economic case for cushioning Kenyans with social security

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This article first appeared in my column with the Business Daily on March 22, 2015

Often discussions around social security and welfare in Africa are grounded in the narrative of human rights: the right to health, food, employment, and so on.

Kenya should seriously consider putting more public funds into social security because of the economic benefits it can catalyse.

Social security can be loosely defined as the provision of a steady stream of income to replace lost wages due to unemployment, retirement, disability, or death.

In Kenya, social security is weak and only limited to free primary education, a presidential bursary scheme, retirement funds, insurance for work-related injuries, limited cash transfer programmes and the National Hospital Insurance Fund.

Implementation of these benefits, however, is mired in bureaucracy, corruption and poor implementation. The urgency of expanding social security protection is dire given that 46.7 per cent of Kenyans have difficulty getting food.

hunger(source: http://logbaby.com/files/logo/14596.jpg)

Let’s look at poverty, the ironies therein and how social security resolves the mess. Low income people have a high propensity to consume; meaning they want to buy goods and products but lack the means to do so.

Ironically, those with the highest hunger to consume are often unable to do so.

By providing income support, social security provides a means through which the poor can meet their basic needs.

This bolsters the economy because beneficiaries spend their monthly benefits, which in turn boosts the economies of counties in which the money is spent.

Remember that often those who receive social security benefits are unable to save. Kenya’s savings rate is 13 to 14 per cent of the gross domestic product.

gdp(source: http://www.tutor2u.net/blog/images/uploads/shutterstock_81874246.jpg)

Beneficiaries spend the money on goods and services, pumping it back into the economy. Clearly, this leads to the next point, the multiplier effect of social security

Income used to buy goods and services allows companies to register more profits and hire more employees who then spend their wages on more goods and services. This creates a virtuous cycle of increased spending and income for more Kenyans.

Thirdly, social security is a massive employer. In the US alone, for example, nine million jobs are linked to the social security system. The flip side of this is that, if done carelessly, it could add to the already onerous public wage bill.

However, this needn’t be the case as a creative reorganisation of the current public office positions could surely reallocate thousands of shillings to meet the needs of the most poor within a social security mandate.

Also, is something to be said for tapping into the skills of employable individuals, engaging them in meaningful work and lowering unemployment rates.

Further, Kenya arguably has a problem with labour oversupply giving rise to high unemployment, wages are often low, interest rates are high and therefore aggregate demand is muted. Social security provides an injection of capital that boosts aggregate demand.

sovereign-wealth-fund0Finally, social security strengthens savings and lowers dependency rates. This dependency dampens the ability of Kenyans to save and invest. Once relieved of the high levels of dependency, those earning an income can plan the use of their capital in a more productive manner.

Ms Were is a development economist. Email: anzetsew@gmail.com Twitter: @anzetse