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“Emerging Africa,
its middle class and
new development challenges”
International Institute of
Social Studies in The Hague
Part of Erasmus University Rotterdam
Lecture by Carlos Lopes,
UN Under-Secretary-General and
Executive Secretary, ECA
The Hague, Netherlands
12 February 2015
You have heard often that Africa is one of today’s fastest growing regions in
the world. But you have not heard enough. This is such an important turnaround of fortunes that it deserves to be repeated many times.
The continent has been experiencing robust growth over the last decade
(around 5 percent and higher for some countries) and continues to expand at
a moderately rapid pace. The continental expansion was underpinned by higher domestic demand, coupled with improved regional business environment
and macroeconomic management, increasing public investment especially in
infrastructure, a buoyant services sector and expanded trade and investment
ties with emerging economies.
Economic prospects remain bright with Africa’s GDP growth rate expected
to remain in the range of 5%. This performance is expected to be only slightly
lower than that of the East and South Asia region, whose growth is expected
to moderate to around 6% over 2014–2016.
The positive growth performance has not impressed the masses of unemployed Africans, particularly the Youth. It is a performance that is not transformative and has been characterized by persistent weaknesses in areas crucial
for a real change of the economic structures. One of the particularities of this
growth is that in the recent years, it has been gradually fueled by domestic
consumption.
While mineral resources and other commodities have undoubtedly continued
to be important, the most significant contributors to growth have changed,
with a lesser role for exports and more reliance on a domestic demand. It
is a demand fueled by a growing middle class with new patterns of income
consumption.
Growth in private consumption and investment (gross capital formation)
is expected to continue to drive overall GDP growth, based on consumer
confidence and an expanding middle class. Investment is driven mainly by
an improved business environment and lower costs of doing business in for
example Burkina Faso, Burundi, Côte d’Ivoire, Ghana, Kenya, Mauritius,
Rwanda, and Tanzania.
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The growing importance of private consumption and investment in Africa’s
growth profile underscores the importance of nurturing Africa’s middle class.
Indeed, emerging economies such as China have recognized the strategic importance of deepening the domestic market through the development of a
strong middle class.
The volatility of commodity prices, coupled with sluggish global trade, suggest that growing domestic demand through the nurturing of Africa’s middle
class should be a prominent feature of the continent’s strategy for structural
transformation. Some believe, nevertheless, that such an ambition may be
misplaced.
If one looks at current context the “Africa rising” narrative may be challenged.
Economic stagnation in Europe and Japan has seen the introduction of stimulus packages that dwarf Africa’s economic size. Yet the public deficits there
continue to grow and the malaise of deflation has become their number one
concern. Recent positive growth in the US has contributed to the phasing
out of its quantitative easing, with enormous consequences for the currency
markets, eroding most of the gains from largest exporting regions of Asia and
Latin America. Russia’s economy is contracting fast. China is experiencing its
slowest growth rate since a quarter of a century. And the list goes on.
The IMF has just revised its global growth forecast, downwards, to 3.5%,
despite the theoretical incentive cheap oil prices should provide to industrialized economies. The extent of the damage provoked by the 2008-2009
crises is still being assessed. Many pundits believe we are not yet out of the
doldrums, justifying strong calls by the US and the European Central Bank
for new policies.
Under this calamitous pressure Africa seems to be doing better than the rest.
Its forecasted growth has been revised downwards as well, but in a scale that
puts the continent above any other. The IMF now believes growth in 2015
will be just below 5%. However if the lessons of previous crisis cycles are to be
taken into account Africa will probably perform better than predicted.
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I know many will accuse me of optimism, but in fact the reasons for a fairer
reasoning are widely shared by specialists.
According to an Ernst & Young1 recent report Africa is the second most attractive investment destination, after Southeast Asia. They also say Intra-African Foreign Direct Investment is soaring and has grown at 32.4% a year.
According to the World Bank by 2030 the continent’s savings will be in the
range of 23 trillion USD, from the current 12 trillion. Rand Merchant Bank
estimates over 5% growth in disposable income2. McKinsey3 projects Africa
as the second fastest consumer growth market. Deloitte & Touche4 says that
is true for investment on the same consumer market by 2017. Standard Chartered Bank believes the actual real growth in the continent may be closer to
7% if the real numbers could be mastered. Every country that did a rebasing
of national accounts discovers their economy is considerably bigger. Financial
data provider Dealogic predicts more than 656 mergers and acquisition deals
may have taken place in 2014, up from 67 in 19955. The “Financial Times”
reports that the London Stock Exchange “is launching an aggressive attempt
to increase the number of listings of African companies”, given the enormous
demand for these stocks.
The skeptics may be unconvinced. In order to persuade them we need to do
better.
Take the unfavorable headwinds of falling commodity prices. They are reminding us that Africa cannot remain at the lower end of the value chain.
Geopolitics is at play in the decline of the global crude oil prices, for example.
The current drop of 44.1% between June and December 2014, or a monthly
average decline of 7,4% is happening at the back of the US shale gas boom,
coupled with huge accumulated stocks, the need to exhaust the artificial price
increases of the recent past and limited demand in emerging economies.
1 EY’s attractiveness survey Africa 2014
2 http://www.ventures-africa.com/2014/09/nigeria-tops-african-retail-investment-ranking/
3 McKinsey report the Rise of the African consumer
4 The Deloitte Consumer Review Africa: A 21st century view
5http://www.ft.com/intl/cms/s/0/47dee88a-795c-11e4-a57d-00144feabdc0.html#axzz3REU2j5fs
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Africa accounts for just 7% of oil output, 3.6% of coal production and 1% of
gas output. Still energy production is Africa’s largest export. We will suffer
from that end of the spectrum. But since most countries are oil importers
the current price trends are actually welcomed. In any event Africa is expected to reduce its exports from 51% to 36 % by 2035 to meet growing
domestic demand6.
Natural gas export projects have been derailed from Australia to Africa. Tanzania, Mozambique and Nigeria want to develop giant gas fields, while boosting the economy in the short term. This could tie them to commodity cycles
and the dominant position the US will assume in the market. Meanwhile,
China is filling strategic and commercial reserves at relatively little cost. Analysts suggest that 308 million tons imported in 2014 were not merely demand
driven as China increased its refined products exports7. This is additional
competition for African countries that need to enter the refined products
market in order to continue the diversification process.
Nigeria, Ethiopia and the Democratic Republic of Congo are still very modest per capita energy consumers despite their large populations. The diversification process offers an opportunity for African oil producers to shift from
exports to transformation. The future of our energy production is to look into
African markets demand.
Metal prices have fallen far less than oil prices in the last six months. Still for
countries that depend on one single metal, such as Zambia, this will hit hard.
The same is fortunately not true for most of the continent’s soft commodities.
In any event, the continent’s economic growth is now more diversified. Governments have worked hard to make life easy for investors. Rwanda, 21 years
later, is now better placed for investors than Italy. Foreign investors are becoming more interested in the non-resource sectors of African economies.
A third of intra-African foreign investment is in financial services. Most
of Nigeria’s growth came from non-oil sectors such as financial services. In
1998-99, during an oil-price fall, Nigeria Naira lost 80% of its value. Today,
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African energy the big league beckons in African Business march 1, 2014
http://www.ft.com/intl/cms/s/0/78f88222-9aff-11e4-882d-00144feabdc0.html
services represent 60% of GDP in Nigeria. Angola, Africa’s second largest oil
producer in 2013, had 5.1% growth last year coming mostly from manufacturing and construction.
The continent is less at the mercy of commodity markets as telecommunications, transportation and finance are all expected to spur economic growth.
Better fiscal policy is playing an important role. Financial markets have heeded the call from African countries to fund their huge needs for investment
into infrastructure and services through sovereign debt. Kenya, in the midst
of its fight against terrorism received 2 billion USD. Ethiopia, Nigeria, Senegal, Rwanda, Ghana, Zambia, and Cote d’Ivoire all had demand outstripping
their bonds offer. Others accessed funds directly such as Morocco and Djibouti. However it is important to note this easiness may be over. The lower
rates some obtained will jump in light of increased risk perception. This will
make debt control calls more strident and buyers more cautious.
All the above trends and undercurrents point to the spectacular anchorage of
Africa’s growth in internal demand. And that demand is intrinsically linked
to one key factor I have mentioned: the growth of the middle class.
Let me first revisit the concept of the middle class, since it has been used in
different ways by different scholars. There are at least two major approaches
to understanding the concept. Some scholars focus on consumption patterns
and its relation to cultural identities. Others emphasize the notion of a unifying consciousness or common values of the middle class. In this context
middle class is identified as a new group of consumers and as the carrier of
democratic values and societal progress (Neubert D., 2014).
The definitions based on consumption patterns and ideology is related. Income levels influence ideology and institutional background. However the
assumption that the middle class shares a common ideology, or that it is
homogeneous, is problematic and not consistent with the varied ideological
views within the middle class.
I would like this lecture to rather focus on the consumption patterns and
income definition of the middle class.
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Even if one assumes that the middle class should be defined based on consumption patterns or income, there is no agreement on what income levels
constitute the middle class. Different scholars propose different measures.
Examples include:
• Ravallion (2009)8 who proposed expenditure thresholds per capita
for measuring the developing world’s middle class. He argued that
the relevant threshold should range between households with per
capita consumption at or above $2 a day per person (which is the
median poverty line for 70 developing countries) and households at
or below $13 a day per person (the poverty line in the United States
of America).
• Banerjee and Duflo (2008)9 define the middle class as those living between US$2 and US$10 per day. To assess differences in characteristics among those at the lower and upper ends of this range, they focus
on two middle-class segments – those between US$2 and US$4 and
those between US$6 and US$10. They find a substantial difference
between these two groups in terms of the share of casual wage workers
versus regular wage workers, with the share of casual wage workers in
the US$2 to US$4 range nearly as high as among the poor between
US$1 and US$2. This reflects widespread informality and vulnerability among workers in the US$2 to US$4 category.
• Birdsall (2010)10 develops a hybrid approach using both absolute and
relative measures and defines the middle class in the developing world
as people living in households at or above the equivalent of US$10
a day at Purchasing Power Parity in 2005, and at or below the 95th
percentile of the income distribution in their country.
8 Ravaillon (2009), the Developing World’s bulging but vulnerable Middle class. World
Bank Policy Research Working Paper 4816.
9 Banerjee and Duflo (2008), what is middle class about the middle classes around the
world? Journal of Economic Perspectives, 22(2): 3-28
10 Birdsall (2010), the (Indispensable) Middle Class in Developing Countries; or, The Rich
and the Rest, Not the Poor and the Rest. Center for Global Development Working paper 207
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• Chun (2010)11 focusing on developing countries in Asia, defines the
middle class as those between US$2 and US$20.
• Kharas (2010)12 focused on the developed world and defined the middle class as individuals living in households with per-capita daily consumption of between US$10 and US$100 at PPP
Obviously, estimates of the size of the African middle class vary, depending
on the definition employed. However, all the estimates point to its growth.
In the past decade, more than one in three Africans have entered the middle
class, and their numbers are set to increase, partly thanks to rapid urbanization, decrease in poverty and improvement of education. Today at least 370
million Africans, or 34% of the continent’s 1.1 billion people, are described
as members of the middle class, and by 2060 it should represent 42% of the
population (AfDB).
A recent report provided by Standard Bank, South Africa, analyzed 11 of the
biggest economies in the region13, accounting for about half of sub-Saharan
Africa’s population and GDP. The results indicate that:
• Nigeria is by far the biggest source of the new middle class in Africa,
while several East African countries are lagging. By 2030, there will be
12 million middle-class households in Nigeria alone.
• Other countries expecting significant growth of the middle-class
households by 2030 are Ghana (1.6 million), Angola (1 million) and
Sudan (1million). Angola has 21% of households in the middle class,
Sudan has 14% and 10% in Zambia
• By 2030, the households in these 11 countries will be contributing
$820-billion in annual consumption.
11 Chun (2010), Middle Class Size in the Past, Present, and Future: A Description of Trends
in Asia. Asian Development Bank Economics Working Paper Series No. 217 12 Kharas (2010), the Emerging Middle Class in Developing Countries. OECD Development Centre Working Papers.
13 Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Sudan, Sudan, Tanzania,
Uganda and Zambia.
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AfDB identifies North Africa with the largest share of the middle class (77
percent), followed by Central Africa (36 percent) Southern Africa (34 percent) and West Africa (34 percent). East African countries are at the bottom
of the ranking with just a quarter of their nationals in the middle class. These
estimates are based on a definition of the middle class as having a purchasing
power parity of between $2.20 and $20 a day (AfDB).
The same study found that the middle class is strongest in countries with a
robust and growing private sector. Along with the rise of the middle classe
new investment and business opportunities emerge. A good example is South
Africa where Walmart, the world’s biggest retailer, has invested USD 2.4 billion acquiring a majority stake in South African grocery retailer Massmart
so it can springboard across Africa, starting in Nigeria. From the UK, London-based Lonrho is investing USD 300 million in the continent, setting up
a new regional airline and opening 50 mass market hotels (Nirmal Heeralall,
2012)14.
If the middle class is growing, the population growth is propelling it as well.
Africa’s population is growing at a faster rate than any other region and projections show that by 2020, 3 out of 4 Africans will be on average, 20 years
old. These young, mostly professionals, creative, resourceful and increasingly
educated, will constitute the future labor reservoir of the continent and… if
all the conditions of labor inclusiveness are fulfilled, enlarge the ranks of the
burgeoning middle class.
A possible demographic dividend requires consistent policies. It is hard to say
the continental agenda has fully embraced such a path. It is more plausible to
believe a possible industrialization drive could sparkle the policy environment
that will incentivize the development of demographic dividend prioritization.
For the moment Africa needs to learn from other regions that went
through similar rapid transformations. It has do it fast. It has to do it
faster than any other.
14 Nirmal Heeralall (2012). The world’s fastest-growing middle class. July 2012
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