Dynamics of the Middle Class in Africa Afdb

e Middle of the Pyramid: AfDB Dynamics of the Middle Class Market Brief Chief Economist Complex 1 April 20, 2011 in Africa www.afdb.org Some Key Messages 1 Introduction of the Study 1.1 Empirical evidence shows that growth of CONTENTS • Strong economic growth in the past two the middle class is associated with better decades has helped reduce poverty in governance, economic growth and poverty 1 Introduction Africa and increased the size of the middle reduction. It appears that as people gain class. middle class status, they are likely to use their 2 Definitional Issues, • By 2010, the middle class had risen to greater economic clout to demand more Data Sources 34% of Africa’s population2—or nearly 350 accountable governments. This includes and Methodological million people—up from about 126 million pressing for the rule of law, property rights and Approach for the Study or 27% in 1980, 27% in 1990 and about a higher quantity and quality of public services. 220 million people or 27% in 2000. This 3 Africa’s Emerging represents a growth rate of 3.1% in the 1.2 Strong economic growth in Africa over Middle Class middle class population over the period the past two decades has been accompanied 1980 to 2010, compared with a growth by the emergence of a sizeable middle class 4 The Middle Class rate of 2.6% in the continent’s overall and a significant reduction in poverty. Also and Their population over the same period. rising strongly has been a robust growth in Characteristics: • About 60% of Africa’s middle class, consumption expenditures as a result of this a Profile approximately 180 million people, remain growing middle class. Consumption in the barely out of the poor category. They are in continent now stands close to a third of 5 Factors Driving a vulnerable position and face the constant Developing European countries. the Growth possibility of dropping back into the poor of the Middle Class category in the event of any exogenous 1.3 Fostering the growth of the middle class shocks. should be of primary interest to policy makers. 6 Conclusion • The ICP results of 2005 show that per The middle class is a strong medium and long capita expenditure among Africa’s middle term development indicator, partly because its class has increased almost two-fold, growth is strongly associated with faster compared to more marginal increases in poverty reduction. In a region with a substantial other regional economies in the developed number of the world’s poor, this association countries. Consumer spending in Africa, provides an opportunity for countries in the primarily by the middle class, reached an region to translate the recent impressive estimated $680 billion in annual growth into even greater poverty reduction by expenditures in 2008 - or nearly a quarter harnessing appropriate policies. of Africa’s GDP based on 2008 purchasing power parity. 1.4 The brief addresses the implications of • Africa’s middle class is a key source for Africa’s growing middle class for the African private sector growth in Africa, accounting economy and for poverty reduction in the for much of the effective demand for goods region. In particular, it argues that the middle and services supplied by private sector class may hold the key to a rebalancing of Mthuli Ncube entities. African economies towards more dependency [email protected] +216 7110 2062 Charles Leyeka Lufumpa [email protected] +216 7110 2175 Kayizzi-Mugerwa, Steve 1 Prepared by Maurice Mubila, Chief Statistician (ESTA) and Mohamed-Safouane Ben Aissa (ESTA Consultant) [email protected] under the supervision of Charles Leyeka Lufumpa, Director, Statistics Department (ESTA). +216 7110 2064 2 The total African population considered, by linear extrapolation of the results of the study population sample. African Development Bank e Middle of the Pyramid: Dynamics of the Middle Class AfDB in Africa Market Brief • April 20, 2011 • www.afdb.org on domestic demand and away from a heavy robust and growing private sectors7. Africa’s expenditures by different percentiles based reliance on exports, as well as to greater and middle class is not only crucial for economic on actual household survey data. In addition, more efficient poverty reduction and inclusive growth but is also essential for the growth of PovcalNet provides information on mean growth. It presents evidence based on democracy. household per capita income or research and studies of 45 African countries. consumption levels in 2005 PPP dollars. Definition of the Middle Class 2 Definitional Issues, in the Context of this Study 2.6 The database primarily provides sample Data Sources and the distributions based on consumption except in Methodological 2.4 This brief uses an absolute definition of instances in which only income measures Approach for the Study per capita daily consumption of $2-$20 in exist. At lower income levels, the difference 2005 PPP US dollars to characterize the between consumption and income is small. What is the Middle Class? middle class in Africa. The study provides But this difference tends to grow with wealth three sub-categories of the middle class. The and thus should be considered a potential 2.1 The middle class can be defined in first sub-category is that of the “floating measurement error in the analysis. Still we relative or absolute terms. In relative terms, class” with per capita consumption levels of expect that these differences are relatively the middle class is defined as individuals or between $2-$4 per day. Individuals at this minor as there is a high correlation between households that fall between the 20th and level of consumption, which is only slightly income and consumption especially at lower 80th percentile of the consumption above the developing-world poverty line of levels and thus should have little effect on distribution or between 0.75 and 1.25 times $2 per person per day (the second poverty overall computations. We also focus on median per capita income, respectively3. line) used in some studies8, remain largely consumption as it better captures individual Using the absolute approach, the middle vulnerable to slipping back into poverty in the welfare and is less prone to fluctuations class is usually defined as individuals with event of some exogenous shocks. This caused by negative and positive shocks. annual income exceeding $3,900 in category is crucial because it is a hinge purchasing power parity (PPP) terms4 or between the poor and lower middle class 2.7 The data used in the identification of with daily per capita expenditure between category. This class is vulnerable and the characteristics of the middle class $2 to $4 and those with daily per capita unstable, but it reflects the direction of (section 4) was obtained mainly from the expenditures between $6 and $105. change in population structure through time. AfDB Data Platform database and other The second sub-category is that of the international sources. 2.2 The middle class is widely “lower-middle” class with per capita acknowledged to be Africa's future, the consumption levels of $4-$10 per day. This Methodological Approach9 group that is crucial to the continent's group lives above the subsistence level and economic and political development. But it is able to save and consume non essential 2.8 The tabulated distributions and their is difficult to define exactly who falls into this goods. The third sub-category is the “upper- means are used to generate a Lorenz curve key group and even harder still to establish middle class” with per capita consumption for each country to show the share of income how many middle class people there are in levels of $10-$20 per day. for each proportion of the population. The Africa. Recent estimates put the size of the line of equality depicts a situation of perfect middle class in the region in the Data Sources equality in a society where a given proportion neighborhood of 300 to 500 million people, of the society would have an equally given representing the population that is between 2.5 A variety of data sources were used to proportion of the income. The extreme Africa's vast poor and the continent's few create the population distributions and opposite would be where an individual would elite. Africa’s emerging middle class determine the size of the African middle class have all the income while everyone else has comprises roughly the size of the middle (section 3). For African countries, the primary none. The Lorenz curve is normally used to class in India or China6. source for the distribution data was obtained represent inequality in the distribution of from the World Bank’s PovcalNet database, income among the population. The further 2.3 It is also argued that Africa’s middle which provides detailed distributions of either the curve is away from the line of equality, the class is strongest in countries that have income or household consumption more unequal the income distribution is in a 3 Birdsall et al, 2000. 4 Bhalla, 2009. 5 Banerjee and Duflo, 2007. 6 Mahajan, 2009. 7 Ramachandran, 2009. 8 See Ravillion, Chen, and Sangraula, 2008. 9 See Box 2 in the Appendices for more details on the methodological approach. 2 African Development Bank e Middle of the Pyramid: Dynamics of the Middle Class in Africa AfDB Market Brief • April 20, 2011 • www.afdb.org society. The Gini coefficient, also measures the Lorenz curve showing the proportion of 2010, the middle class (included floating levels of inequality, and is derived from the the population and their share of national class) had risen to 34.3% of the population— Lorenz curve.

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