Africa banks on middle-class consumers to drive its growth

One of the noticeable things across Africa is how many people have cell phones — 71 per cent of adults in Nigeria, for example, 62 per cent 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 UK-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, 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 percent of sub-Saharan Africa’s population) in 2010 to 1.1 billion (42 per cent) in 2060, the bank says. And this middle class is the key to Africa’s future prosperity.

Africa has struggled with development challenges, including 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, 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 $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. 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 per cent of the population, standing at 111 million. A decade later it had risen to 27 per cent, or 196 million, and by 2010 more than a third of the population was middle class, says AfDB.

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 percent of them are under the age of 40.

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 three per cent 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.

Robust private sector

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 per cent a year, the share in the informal sector will still dominate at 60 to 70 per cent 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 telecoms infrastructure.

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.

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 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 more than $1 trillion and an estimated consumer base of 700 million people. This significant market will appeal to foreign as well as domestic investors. 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 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.
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 a 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 needs 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.

Diaspora support

The African middle class is rising as the continent is integrating with the global economy. Likely to foster global connectivity is the large number of Africans in diaspora — estimated at 30 million or more, and a possible source of investment.

The main influence of this diverse community has so far been through the money its members send home, which is estimated at $38 billion annually. Unrecorded transfers could make that remittance total closer to $60 billion. These flows, of which a large proportion supports emigrants’ families back home, significantly dwarf the $25 billion in official development assistance Africa receives yearly.

But the African diaspora is increasingly an important source of the investment capital that supports the growth of the middle class.

Africans in diaspora are helping to build a new generation of universities that not only increase competence but foster the growth of the middle class. One example is Ashesi University College in Ghana, started by Patrick Awuah, a former Microsoft employee and graduate of the Haas School of Business at the University of California, Berkeley. The college aims to train “a new generation of ethical, entrepreneurial business leaders in Africa and to nurture excellence in scholarship, leadership and citizenship.”

There are similar developments in even poorer parts of Africa. For example, Northern Somaliland, which declared independence after the fall of Somali military dictator Siad Barre in 1991, has relied significantly on its diaspora to build institutions of higher learning. It started by building the University of Hargeisa, followed by the establishment of Burao University, Amoud University, Somaliland University of Technology, and Gollis University.

The growing contribution of African diasporas to the rise of the middle class is reinforced by greater connectivity and mobility. Direct flights between the United States and west Africa, for example, ease investment flows into the region.

Updated infrastructure

Universities and other institutions of higher learning play a key role in providing the local knowledge needed by entrepreneurs. For historical reasons, African universities tend to focus more on traditional education functions than on technical and entrepreneurial skills.

First-generation African universities were designed to train postcolonial civil servants; departing colonial administrators had little interest in training Africans to be agents of economic change. This traditional approach became the model for new universities, even though economic demands called for greater emphasis on technology and business. But as Africa invests in new and updated infrastructure, the associated projects offer an opportunity to build up the region’s capabilities in project design, execution, and maintenance. And regional energy, transportation, irrigation, and telecommunications projects in turn will provide the basis for technical training.

Such specialised universities can combine theoretical training with practical work through experiential learning, which will help to diversify approaches to higher education without the need to reform existing universities, some of which might voluntarily adopt the new models.

There are already such universities in Africa and elsewhere—for example, Egypt, Ghana, and Kenya have schools dedicated to the telecoms sector. Moreover, Africa’s varied exports, such as minerals and agricultural commodities, are associated with long value chains that provide a rich basis for curriculum development and pedagogical innovation, in diverse locations.

Coffee, chocolate, tea, flower, copper, and diamond production curriculums are just waiting to be developed. Pittsburgh’s Carnegie Mellon University has established a branch in Rwanda for graduate training in technology and entrepreneurship, which will position the country as a technology hub and serve surrounding countries as well.

The rise of the middle class brings growing urbanisation — centres of population that can drive growth and creativity.

Lagos, the former capital of Nigeria, was once left for dead after federal leaders retreated to found a seat of government in the hinterland. Today it is a bustling symbol of economic renewal, thanks in part to the city’s dynamic leadership but largely because of residents’ entrepreneurial spirit.

Nearly 20 per cent of Lagosians are now members of Nigeria’s growing middle class. The recent survey by Renaissance Capital predicts that the Nigerian middle class in Lagos will significantly boost local and international demand for manufactured goods.
One way to tap into the urban potential is to reposition cities as innovation hubs. Lagos, for example, recently set up the Innovation Advisory Council, aimed at supporting government efforts to upgrade its technological and entrepreneurial dynamism. The council is chaired by the state minister for science and technology, whose functions are changing from the traditional role of supporting research to a new focus on fostering innovation.

This shift will go a long way toward enhancing the role of the middle class as an economic force in the region
But new technology sectors and urban-based vision are not the only sources of growth. There is also vast untapped potential for African agriculture, which has actually regressed.

For example, fertiliser use is strikingly low—only 13kg a hectare in sub-Saharan Africa compared with 71kg in northern Africa. As Africa’s middle class grows, policymakers should place a premium on regional economic integration and the associated investment in infrastructure, technical training, and support of entrepreneurs. Investing in consumers will bring prosperity to Africa—and not just for the middle class. ?

Juma is Professor of the Practice of International Development and Director of the Science, Technology and Globalisation Project at Harvard Kennedy School. This article was first published by the International Monetary Fund (IMF).