inequality

Africa’s Aggregate Demand Problem

Posted on

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

Advertisements

Implications of the Economic Survey 2018

Posted on

This article first appeared in my weekly column with the Business Daily on April 30, 2018

Last week the Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2018 providing data on the economy for 2017. There are several data sets that should be noted and inform economic strategy going forward.

Firstly, the economy is estimated to have expanded by 4.9 percent in 2017 compared to 5.9 percent in 2016; that is a reduction of 1 percent year on year. This is unsurprising and in fact good news because previous analysis indicates that the Kenyan economy tends to slow down in an election year by about 1.2-1.4 percent. Thus, a reduction by 1 percent, particularly in a drought and election year, indicates the fundamental engines of the economy are robust. Growth was powered by accommodation and food services; ICT; education; wholesale and retail trade; and Public Administration.

Kenya’s top export earners last year included tea and, horticulture products. FILE PHOTO | NMG (source: https://www.businessdailyafrica.com/analysis/ideas/Implications-of-the-Economic-Survey/4259414-4535818-3tjw81/index.html)

Secondly, GDP per capita increased from KES 158,575.5 in 2016 to KES 166,314.4 2017. Inflation aside, the increase in per capita is good news and indicates that on the whole, economic growth is rising faster than the population thereby leading to net growth in income. However, poverty remains prevalent thereby implying the inequality remains a core problem in the country. The survey shared insights for the 2015/16 Household Survey which indicated that overall poverty stood at 36.1 per cent (16.4 million people), food poverty at 32.0 percent (14.5 million people), and hard core poverty at 8.6 percent (3.9 million people); in all cases poverty is higher in rural than urban areas. This indicates that the rural-urban wealth divide is real and will likely continue to catalyse rural-urban migration as Kenyans move to towns and cities in search of higher incomes.

Thirdly, the informal sector continues to employ most Kenyans and accounted for 83.4 per cent of total employment; this is down from about 89 percent last year. Informal employment tends to be of lower quality than formal employment in terms of wages, job security, and working conditions. Thus, the bulk of Kenyans continue to work in a sector is precarious and may very well negatively inform the quality of their lives.

Related image

(source: https://www.standardmedia.co.ke/business/article/2001263519/foreign-investment-forecast-to-slow-down)

Finally, data on exports paints an interesting picture in that top export earners were tea, horticulture, articles of apparel and clothing accessories, coffee, and titanium ores and concentrates. Thus, Kenya’s exports continue to be dominated by agricultural products and products with limited value addition particularly given that manufacturing sector growth was very weak last year and grew at 0.2 percent.  Further, Africa remained the leading destination of Kenya’s exports, accounting for 37.7 percent of total exports in 2017, with East African Community (EAC) accounting for more than half of total exports to Africa. What this means is that Kenya’s exports mainly go to countries with low GDP per capita that informs spending power and aggregate demand. It is important that the country restructures exports such that they are more sophisticated and target countries with higher incomes so that exports become a stronger engine for job creation and income growth.

Anzetse Were is a development economist; anzetsew@gmail.com