The middle class – Africa’s new growth engine

Business environment and entrepreneurship

Together with government economic policies that foster growth, the emergence of an African middle class has been driven by a robust private sector led by local entrepreneurs, whose rapid adoption of emerging technologies will boost middle-class potential. Advances in information and communications technologies, for example, offer new business opportunities for young people.

This is not to deny that the majority of Africa’s labour force will still be in the informal sector, working in low-productivity, low-earning jobs. Even if formal sector wage employment grows at 10% a year, the share in the informal sector will still dominate at 60% to 70% in 2020.

Rwanda, still remembered for its 1994 ethnic bloodshed, offers a glimpse of what the future of the African middle class could look like. Inspired by the prospect of integrating with the global economy, young Rwandans are tapping into the latest technologies to start new businesses.

Clarisse Iribagiza and other engineering students at Rwanda’s Kigali Institute of Science and Technology started HeHe Limited, a mobile applications development firm, in 2010. The company grew out of training the students received from a Massachusetts Institute of Technology programme, Accelerating Information Technology Innovation, designed to foster entrepreneurship and software-related business development. HeHe is one of many Rwandan start-up firms seeking to take advantage of the expansion of telecommunications infrastructure – especially broadband.

Similar start-ups are appearing in other African countries. In Kenya, for example, new companies are bringing the latest information technology to fields as diverse as entertainment, communications, education, agriculture, and services.

These start-ups demonstrate the long-term economic impact of investment in infrastructure. In 2009, the Mauritius-based Seacom Company launched a $600 million undersea fiber-optic cable connecting South Africa to Europe via the east African coast. According to Seacom’s former CEO, Brian Herlihy, this infrastructure venture catalysed an additional $6 billion investment in terrestrial fiber built for “national backbone” networks, municipal networks, and mobile towers in eastern and southern Africa.

Seventy-six per cent of Seacom’s shares are held by African investors, a sign that foreign capital and technology can leverage local investment in megaprojects that boost business development and growth of the middle class. The next phase for Seacom will help Africa leapfrog into broadband-based services such as cloud computing.

The improved business climate will lead to greater emphasis in coming decades on locally based economic growth, especially in cities, which are often centres of creativity. The new middle class will rise in industrial and agricultural clusters that provide opportunities for innovation and entrepreneurship. Current investments in critical infrastructure such as broadband will lead to greater connectivity, mobility, and clustering of economic activity.

The new African middle class will flourish in knowledge centres that are connected to the global economy. The seeds of such growth can be found in places like Ikeja, the nascent computer-based industrial district of Lagos, and emerging knowledge-based industries such as Nigeria’s movie production network (“Nollywood”) will produce a new crop of entrepreneurs ready to shape the character of the next generation of middle-class Africans.

Regional markets

In addition to promoting local sources of economic growth, Africa is moving rapidly to foster regional integration aimed at creating larger continental markets. The most inspiring of such efforts is the June 2011 launch of negotiations for a Grand Free Trade Area (GFTA) stretching from Libya and Egypt to South Africa.

The proposed GFTA would merge three existing blocs, including the Southern African Development Community, the East African Community (EAC), and the Common Market for Eastern and Southern Africa.

Proponents envision that GFTA will include 26 countries with a combined GDP of over $1 trillion and an estimated consumer base of 700 million people. This significant market will appeal to foreign as well as domestic investors. Local industrial and agricultural development will take centre stage, but many inputs will come from abroad, and talks on developing this tripartite free trade area are already under way.

Larger trading blocs facilitate the economic growth that in turn enhances the expansion of the middle class. It is estimated that the free trade area initiatives of the three existing regional blocs in Africa led exports among the 26 member states to increase from $7 billion in 2000 to over $32 billion in 2011.

These efforts build on ongoing integration efforts in the EAC, including a customs union, common market, common currency, and political federation. The five member countries (Burundi, Kenya, Rwanda, Tanzania, Uganda) count 135 million people with a total GDP (at current market prices) of about $80 billion, representing a powerful consumer base.

The region is currently negotiating the establishment of a monetary union to advance and maintain sound monetary and fiscal policy and financial stability. The negotiations are attempting to take into account the limitations of the euro area by including provisions for fiscal integration and financial stabilisation. If adopted as envisaged, the monetary union would yield Africa’s first genuine regional economy, which would attract foreign direct investment and bolster consumer spending and growth of the middle class.

Meeting the investment challenge

Intra-Africa trade is limited by the continent’s poor infrastructure (mainly in energy, transportation, irrigation, and telecommunications). The Democratic Republic of the Congo (DRC), for example, has a total paved road network of about 3,100 kilometres and is four times the size of France, which has nearly 1 million kilometres. The DRC’s ability to effectively participate in the free trade area will depend on how fast it invests in infrastructure construction and maintenance.

Africa as a whole will need nearly $500 billion over the next decade to meet its infrastructure needs. A number of countries have started implementing ambitious plans to fill this infrastructure gap. Senegal, for instance, is upgrading its energy, road, and airport infrastructure with a view to making the country a regional business hub.

Economic growth in Africa and the associated rise of the middle class depend in part on larger international investment triggered by increased trade, particularly with growing emerging markets. China’s trade with Africa was valued at $10 billion in 2000 and is projected to exceed $110 billion in 2011; India’s, at $3 billion in 2000, is projected to rise to $70 billion by 2015.

These ties do introduce risks: Africa’s overall growth is so highly correlated with its exportation of raw materials to China that it is vulnerable to manufacturing fluctuations in that country.

Beyond the pressing requirements for social investment in education and health, it will take massive injections of capital to bridge the huge infrastructure gap confronting the continent.