middle class

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

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The Middle Class Conundrum in Africa

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This article first appeared in my column with the Business Daily on March 25, 2018

With the emergence of ‘Africa Rising’ narrative, came the related rise of interest in the ‘newly forming’ African middle class. To be clear there are various definitions of this demographic group, but I think the most realistic definition is those who earn between KES 850,000- 4 million a year. You need to be making just over KES 70,000 a month to fit into this qualification. However, even with this relatively generous definition, this middle class is very fluid, limited and difficult to pin down as a ‘steady’ income group.

Indeed, perception and image aside, one can argue that the actual middle class segment that consistently fits within that definition is smaller than often imagined because dropping out of middle class into low income is very easy. That said, there is a middle class present in Africa and one of the key misconceptions of this class is that they have sizeable discretionary income. The reality is more often that the middle class has several classes of priority spending and have to negotiate the use of their own money beyond meeting their basic needs.

Image result for middle class africa

(source: https://www.africa.com/consumerism-rise-africa-2/)

Often the spending power of the African middle class is wildly over-stated in terms of funds for discretionary spending. This is because the lack of a robustly government-financed social welfare net translates to the middle class financing social security services through their own money, thereby eating into ‘non-essential’ spending. The Panglossian narrative about the spending power of the African middle class ignores the fundamental pressure that African middle class pockets feel. Busy supporting friends and relatives, there is often little left over for indulgent spending for many people.

That said, aspirational capitalism has taken root in Africa. Many Africans want big cars, big houses, engage in leisure activities and buy luxury goods. Many are of the view that having worked hard for their money, they ought to spend some of it on themselves. There is even an emerging trend, particularly among the younger middle class, of getting lines of credit to buy furniture, music systems, and go for lunches at high-end cafés; such is the pull of the lifestyle. And while some may choose to spend their cash (or loans) on themselves, it does not negate the fact that many will forgo those purchases to support friends and family in need.

Image result for poor africa

(source: http://www.our-africa.org/poverty)

Ergo, African middle class pockets are pulled in two directions: financing friends and family in need, or using ‘extra funds’ for self-indulgent spending. The weight given to each of those sides is often a personal choice that many must negotiate. It is not a simple choice, and the decision-making process is very personal, nuanced and complex.

Thus companies, particularly those with limited experience in Africa, ought to be careful of boldly strolling into Africa in order to tap into the middle class because not only is it easy for many target consumers to slip into low income, other priorities compete for the same resources.

It is time those watching the African market create more nuanced analysis of this income segment and take the time and effort to truly understand the strange and complex creature that is the middle class African.

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

The Kenyan economy continues to exhibit key weaknesses that must be addressed

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This article first appeared in my column with the Business Daily on March 13, 2016

On Tuesday last week the World Bank launched the Kenya Country Economic Memorandum with the theme ‘From Growth to Jobs & Prosperity’. Apurva Sanghi Lead Economist and Program Leader at the Bank made three core points during his presentation.

The first is that economic growth in Kenya is volatile, non-inclusive and marked by stagnation in agriculture and industry. In terms of volatility Kenya’s growth has been volatile since independence and domestic shocks such as political instability (especially during election years) affect GDP growth more than external ones.

The second point was that growth is not inclusive and the country continues to register high poverty levels, the estimates of which sit between 36-42% in 2016. Further, job creation has been marginal and slow, clearly only able to absorb a fraction of the working age population that enter the labour market each year. Further, of the jobs created, the vast majority have been informal jobs.

(source: http://www.businessdailyafrica.com/image/view/-/2765356/medRes/770583/-/maxw/600/-/swae72/-/jua+kali.jpg)

Another important point made by Sanghi was that economic growth in Kenya has been led by services which has been resilient with clear stagnation in agriculture and manufacturing.  Services exports are catching up with goods exports and this is partly because the sector is less dependent on raw materials and not truly affected by changes in commodity prices. In terms of agriculture, the main factors informing the stagnation include over-involvement of government in maize and sugar markets which keep prices high. In terms of manufacturing, it has marginal contribution to GDP, and Kenya has dropped 8 places in the rank of economic complexity of goods produced by the sector; in fact Kenya’s top exports are among the least complex. Sanghi also mentioned that achieving the Vision 2030 GDP growth rate target of 7% has thus far been elusive with the country reaching 7% only four times since independence. In order for Kenya to grow more robustly and with less volatility, both savings and productivity have to increase, the performance of both manufacturing and agriculture need to improve, and public investment management by government has to improve.

How feasible is this? Well with regard to savings numerous factors negatively inform Kenyan saving habits among which is the reality that there is no real social security net in Kenya. Yes government has a cash transfer system for the very vulnerable and poor but the lived reality for most Kenyans is that they cannot usually rely on government when they fall ill or lose a job. As a result, middle income pockets of Kenyans are under immense pressure for it is the middle and upper class that finance costs such as school fees, hospital bills and funerals for friends and relatives. Coupled with high dependency ratios linked to high levels of unemployment and underemployment, Kenya’s middle class has limited lived disposable income which of course makes saving very difficult.  I have thus long held the view that the hype about the spending power of the African middle class is Panglossian.

(source: http://i.telegraph.co.uk/multimedia/archive/02181/expatrate_savings_2181869b.jpg)

In terms of productivity, the report itself makes the point that levels of productivity vary greatly between sectors and within sectors. Further, most Kenyans are employed in the informal sector which is characterised by low productivity due to a myriad of factors such as poor management skills, poor education levels and the lack of access to finance, technology and innovations. Therefore, the question on which government ought to be focussed is how to increase productivity, particularly in the informal sector. This is not necessarily synonymous with pushing for the formalisation of the informal sector but rather, supporting Kenyans trapped in the primarily low income informal sector by skilling up the population in informal labour, developing apprenticeship programs and loosening finance into the sector.

Finally, public investment must improve with a preponderance of development rather than recurrent expenditure. Public investment strategies must be devoid of corruption in order to ensure government spending is strategic and effective.

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

 

Africa Rising Narrative: All Hype?

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This article first appeared in my weekly column with the Business Daily on August 9, 2015

Africa has grown used to negative images being relayed all over the world through media houses, social media sites, documentaries and even Hollywood movies. These bloody Africans, the commentaries seem to say, why can’t they just get it together? Ebola, famine, corruption, civil wars, fleeing refugees…the list is endless.

So you can imagine the great delight and relief Africans are experiencing from the ‘Africa rising’ narrative painting us in a positive light. Africa is not all doom and gloom, not everyone is mired in disease and corruption. There are ‘African Lion economies’, the promise of prosperity on the continent and George Soros referring to Africa as one of the “few bright spots in the gloomy global economic horizon”.

(source: http://www.howwemadeitinafrica.com/wp-content/uploads/2012/11/Africa_Rising620.jpg)

While this change in narrative is welcome, it is important Africans look at it closely to determine whether it’s mere hype or rooted in robust truths.

There are several foci in the Africa rising narrative — robust economic growth, a growing middle class, better governance and relative political stability, and the demographic dividend of a large, youthful and fairly skilled labour pool. The focus here will be on the economic story. It is true that Africa is one the fastest growing regions in the world with an average annual growth rate of around five per cent. Over the last decade, six of the world’s 10 fastest-growing countries were African.

In eight of the last 10 years, Africa’s ‘Lion’ states have grown faster than some of the Asian tigers. The African middle class is one of the fastest growing in the world and domestic demand has continued to boost growth in many countries. A stable middle class of 126 million exists and will rise to more than 42 per cent of the population in the near future. Further, consumer spending is set to rise from $860 billion in 2008 to $1.4 trillion in 2020.

(source: http://si.wsj.net/public/resources/images/OB-NS701_AFRICA_G_20110501211315.jpg)

Even The Economist, one of the most cynical weeklies when it comes to Africa, states that while some argue African economic growth has been commodity-driven, the economic outlook for many African countries looks promising despite falling commodity prices reflecting the growing economic diversification away from dependence on commodities. Further, FDI is diversifying away from mineral resources into consumer goods and services; this may inform a structural shift of the African economy away from commodities to other sectors.

But let’s not get carried away: such rosy optimism has to be tempered with reality. First, more than 46 per cent of Africans live in poverty and our share of global poverty is due to balloon to 82 per cent by 2030. Many Africans are still poor, struggling to meet basic needs and Africa is set to continue being the poorest continent in the world in the foreseeable future.

Secondly, the statement about a growing middle-class has to be tempered with the reality that the common definition of middle class in Africa is people who spend the equivalent of $2-20 a day, an assessment based on the cost of living for Africans. But the truth is that many living on $2-4 a day are on the edge of poverty and can easily slip back into poverty—how many fall into this bracket?

Further, the high dependency ratios in Africa, partly attributed to the lack of a robust government-funded social security net, translates to higher spending on meeting basic needs of dependents on costs such as health, education and food. This squeezes out more discretionary spending and reduces actual, lived disposable income.

 (source: http://borderlessnewsandviews.com/wp-content/uploads/2013/10/Social-Safety-Net.jpg)

Finally, the commodities reliance question is a mixed bag and depends on the country being considered. Some countries are diversifying while others are not. In Angola, for example, the oil industry accounts for around 45 percent of the country’s GDP, 75 percent of government revenues and 90 percent of overall export earnings. On the other hand, Nigeria’s growth of 6.3% came mainly from non-oil sectors showing that the economy is diversifying. Either way, the good news is that most African governments are well aware of the vulnerabilities to which their economies are exposed in being commodity reliant and some have begun to take steps to diversify the economy and sophisticate export profiles. That said, it is important to note that overall African currencies were negatively affected during a period of turmoil in commodity markets in 2009 and earlier this year the World Bank revised Africa’s growth prospects downward because of fall in the prices of oil and other commodities. Thus, commodity prices will still inform the growth of Africa’s economy but the jury is still out on the extent of this influence.

(source: http://www.finnovators.com/assets/icon_Commodities.png)

The Africa Rising narrative is a welcome shift in the portrayal of the continent across the world but it should not create complacency in Africans or create the impression that Africa will prosper no matter what. Problems exist, work still needs to be done on the continent and Africans need to be engaged now more than ever to drive the continent continuously forward.

Ms Were is a development economist. email: anzetsew@gmail.com; twitter: @anzetse

The African Middle Class: Too much hype?

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This article first appeared in my weekly column with the Business Daily on February 15, 2015

There is a great deal of hype about Kenya’s and Africa’s emerging middle class. Indeed Kenya is considered to have one of the largest middle-class populations in Africa.

Stories abound about global companies and investors eyeing the newest middle class in the world and how they can make handsome profits through tapping into the spending power. Indeed some say that Africa’s consumer spending is set to rise from $860 billion in 2008 to $1.4 trillion in 2020.

Shopping

(source: http://www.ventures-africa.com/wp-content/uploads/2014/01/Shopping.jpg)

But let’s take a step back and look at technical definitions of the middle class: The African Development Bank states that Africans who spend $2 to $20 (Sh92=$1) a day qualify as middle class. The Standard Bank defines it as those who spend $15 to $115 a day.  A point to note is that earning above $2 dollars a day is a commonly accepted definition of the poverty line in developing countries in general because people above the $2 dollar line are above absolute poverty. One questions the prudence of equating not being in absolute poverty as synonymous with middle class.

The first problem of pinning the definition of middle class as individuals spending $2 or $15 (Sh170 or Sh1,275) a day masks the fact that there are high levels of dependency in Africa. Because the government lacks a robust social security net, those who earn income are often supporting several relatives and friends financially. Thus, even if an individual spends Sh2,000, most of this may be spending for dependents, not the individual.

1029_money-wallet_400x400 (source: http://blogs-images.forbes.com/jennagoudreau/files/2011/05/1029_money-wallet_400x400.jpg)

In addition, there are other factors that should be looked at beyond strict figures. As an analyst pointed out, looking at figures does not answer whether this ‘middle class’ has access to affordable health care and  education, and whether they can afford leisure activities.

Those questions are more important than coming up with arbitrary cut-off points. For example, given Kenya’s high mortality rate and burden of disease exacerbated by truly poor health facilities, thousands of shillings are spent on expensive healthcare and individuals are often constrained by such obligations thereby haemorrhaging their earnings on such expenses.

Further, the reality is that poverty is still pervasive. A Standard Bank survey of 11 sub-Saharan African countries, which together account for about half of Africa gross domestic product, found that 86 per cent of their households remain in the low-income band. All these households will focus on meeting basic needs with little room for discretionary spending.

people_compressed (source: http://esango.un.org/ldcportal/documents/10179/11046/people_compressed.jpg?t=1348070174727)

So the level of truly disposable income is important to determine as the reality is that although an individual may be able to afford food from a fine restaurant he or she may have too many dependents to actually go out and make that purchase.

On the other hand, prices for apartments in fashionable districts in certain African cities match those in the global north. So is the narrative truly about the ‘middle class’ or an emerging elite?

Is the trend in Kenya actually one of economic dualism with a deep divide between rich and poor with paltry sprinklings of a middle class? The questionable nature of the Kenya middle class is exemplified by the fact that fast food chains that are fraternised by low-income groups in Europe and North America are the very same found in up-market malls and posh neighbourhoods in Kenya. So does ‘rich’ in Kenya translate to ‘poor’ in the USA?

KFC-goes-to-Kenya-first-US-fast-food-chain-MIALHF4-x-large

(source: http://i.usatoday.net/money/_photos/2011/08/27/KFC-goes-to-Kenya-first-US-fast-food-chain-MIALHF4-x-large.jpg)

The appeal here is one of caution about over-hyping Kenya’s and indeed Africa’s middle class. The commentary has to be tempered with presenting accurate scenarios on the nature of this ‘middle class’ and the depth of the pockets therewith.

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