Is It Time To Rethink The Growing-Middle-Class Theory In African Economies?

Is It Time To Rethink The Growing-Middle-Class Theory In African Economies?

From MoneyWeb. Story by Joe Brock, Reuters.

Millions of Africans have moved out of subsistence farming, but national economies have yet to make the transition from relying on commodity exports to mass manufacturing, the model which transformed living standards in much of Asia.

Now the end of an upswing in global prices for energy, minerals and farm products has hammered economies across Africa and pushed their currencies sharply lower.

This, in turn, is raising doubts about whether the growth of the African middle class has been overplayed. Has the wealth created by the decade of growth been widely distributed, or have only relatively small pools of urban consumers merely benefited from a transient commodity boom?

The expansion of budget retailer Shoprite, telecoms firm MTN and consumer goods giants Nestlé and Unilever shows that many lower-income Africans do have more money to spend.

This spending power, however, seems closely linked to the price of resources. More than 87 percent of government expenditure across Africa is derived from commodity exports, according to consultancy DaMina Advisors.

Foreign direct investment in resource-rich South Africa, Nigeria, Ghana and Mozambique totaled $23 billion in 2013, more than the rest of sub-Saharan Africa combined. Most of that was in commodities production.

As growth slowed, Nestlé said in June that it would cut 15 percent of its workforce in Africa because it had overestimated the rise of the middle class.

Are you interested in getting smart on Life Insurance?
No Doctor Visit Required, Get Policy for as low as $30 per Month
Click here to take the next step

“The fall in oil and metals prices has certainly shown that Africa remains too dependent on commodities,” David Rubenstein, co-CEO of U.S. private equity firm Carlyle, told Reuters. “The ‘middle class’ theory may need a rethink.”

The African Development Bank said in 2011 that 34 percent of Africans were now middle class, in what it described as a bulging “middle of the pyramid”. Under its broad definition, anyone living on between $2-$20 a day was middle class.

Consultancy McKinsey, however, defines the class as households spending $20,000 a year while the OECD’s range is $10-$100 a day. Depending on the calculation, the middle class therefore ranges from 16 million to 327 million.

“There have been numerous studies done on the size of Africa’s middle class, often at cross-purposes,” Razia Khan, head of Africa research at Standard Chartered, told Reuters. “There is now a question mark as to how important the concept of ‘middle class’ might be.”

Backers of the concept say the middle class’s emergence proves Africa has achieved inclusive growth that lifts the masses out of poverty, and not just a commodity-fueled boom which benefits only foreign investors and a local elite.

McKinsey said the middle class, which it reckons accounts for only 1-2 percent of African households, will contribute 40 percent of spending-power growth, suggesting many investors are really targeting the wealthy.

Krispy Kreme Doughnuts and coffee-giant Starbucks have recently announced plans to enter South Africa, the continent’s most developed economy.

Hotel groups such as Marriott and AccorHotels are going ahead with expansion plans in major African cities. These companies are all aiming for high-end consumers, not people living on $2 a day.

“What we are seeing is not a pyramid bulging in the middle but a society where the top spenders are getting richer,” said Morten Jerven, author of “Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It”.

Whether or not it benefits a small or large “middle class”, investment continues to flow into Africa because high returns remain available in pockets. These include established economies such as South Africa as well as the big cities of counties such as Nigeria, Kenya, Ethiopia, Ghana and Angola.

“Perhaps definitions about the middle class aren’t clear,” Carlyle’s Rubenstein said. “But if you ask me: do I think incomes are rising in Africa? Is there a growing consumer class? Are many African countries good investments? I’d say: absolutely, yes.”

Read more at MoneyWeb.