The middle class – Africa’s new growth engine

One of the noticeable things across Africa these days is how many people have cell phones – 71% of adults in Nigeria, for example, 62% in Botswana, and more than half the population in Ghana and Kenya, according to a 2011 Gallup poll.

Cell phone use has grown faster in Africa than in any other region of the world since 2003, according to the United Nations Conference on Trade and Development. Africa became the world’s second most connected region after Asia in late 2011, with 616 million mobile subscribers, according to U.K.-based Informa Telecoms & Media.

Of course, South Africa – the most developed nation – still has the highest penetration, but across Africa, countries have leapfrogged technology, bringing innovation and connectivity even to remote parts of the continent, opening up mobile banking and changing the way business is done.

Seeing the cell phone success, banking and retail firms are eyeing expansion in Africa to target a growing middle class of consumers. According to the African Development Bank (AfDB), one of the results of strong economic growth in recent years has been a significant increase in the size of the African middle class.

The middle class will continue to grow, from 355 million (34% of sub-Saharan Africa’s population) in 2010 to 1.1 billion (42%) in 2060, the bank says. And this middle class is the key to Africa’s future prosperity

Good combination

Following African countries’ independence, the continent has struggled with a seemingly endless array of development challenges, from civil war and political instability to chronic food insecurity, droughts, disease, and pervasive poverty and corruption.

But in recent years, Africa has started to see an economic resurgence. Better economic policies, governance, and use of natural resources, coupled with more business-friendly policies and stronger demand for Africa’s commodities from emerging economies such as Brazil, China, India, and South Africa, have led to consistently high growth levels in Africa, despite the global downturn.

“Over the past decade, despite the successive global food and financial crises, Africa has been growing at an unprecedented rate. Though it will take decades of growth to make major inroads into Africa’s poverty, there is now a growing optimism about Africa’s potential,” says the AfDB report Africa in 50 Years’ Time.

Poverty will be a fact of life for a long time: one-third of all Africans will still be extremely poor in 2060, living on less than US$1.25 a day, according to the AfDB.

To the outside world, the symbolism of helping people living on a mere $1 a day had irresistible appeal. But the emphasis on aid did not encourage Africa to aspire to higher economic performance. A change in focus from poverty to gradually growing prosperity represents a deep shift in the perceptions of Africa’s economic future, with profound policy and practical implications.

The traditional emphasis on eradicating poverty in Africa distracted both the African authorities and international donors from serious consideration of ways to promote prosperity: infrastructure development, technical education, entrepreneurship, and trade.

What do we mean by middle class?

It is not an easy task to define what middle class means or how many people fall in that category across the 47 countries of sub-Saharan Africa. But the group we are referring to falls somewhere between Africa’s large poor population (defined as those living on less than $2 a day) and the small, rich elite.

These people are not middle class in developed country terms, or even by the standards of emerging markets, but in African terms they have disposable income and are demanding an increasing amount of goods and services that contribute to the overall well-being of society. Their average income is between $1,460 and $7,300 a year.

According to the AfDB, Africa’s middle class has been steadily rising since the 1980s. In 1980 the middle class accounted for 26% of the population, standing at 111 million. A decade later it had risen to 27%, or 196 million, and by 2010 more than a third of the population was middle class.

Middle-class Africans are young and in the acquisitive phase of life, according to a recent survey of the Nigerian cities of Lagos, Abuja, and Port Harcourt by emerging market investment bank Renaissance Capital. Nearly 70% of them are under the age of 40. About half at any given time are in the market for refrigerators, freezers, and other durable consumer goods. And that consumer demand extends to other sectors – such as housing, home improvement, transportation, and leisure.

Consumer spending in Africa is projected by the McKinsey Global Institute to reach $1.4 trillion in 2020, from about $860 billion in 2008. Decisions by major consumer retail chains such as Walmart to establish a presence in Africa reflect global confidence in the economic impetus we can expect from the African middle class.

By 2030, African countries with large populations – such as Ethiopia, Nigeria, and South Africa – will be the main sources of the new middle class, who can be expected to spend $2.2 trillion a year, or about 3% of worldwide consumption.

Across Africa, change is in the air. Many of the old problems remain – deep poverty, poor infrastructure, and famine in areas of a continent abundant in natural resources. But equally remarkable is the rise of a new generation of young entrepreneurs creating new opportunities for ancient lands.

Factors that make this change possible range from a business environment that fosters locally based growth to increased regional integration and new forces for globalisation that spur increased opportunities for growth.