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Sunday, March 2, 2014

Kenya’s Middle Class: Myth and Reality

Africa’s rapidly growing population is under scrutiny for evidence of a bulging middle class. Although Africa’s consumer market is growing it is nothing like the romanticized image projected by media and marketing pundits – a group awash with disposable income and an insatiable appetite for luxury consumption.

In 2011 the African Development Bank estimated that Africa’s middle class had risen to 350 million; larger than the middle class in China, India and larger than the combined population of Canada and the United States of America. In 2013 Deloitte projected the Africa’s middle class will reach 1.1 billion, 42 percent, by 2060.

But who is the middle class? The African Development Bank (AfDB) defines the middle class as those spending between $2 and $20 a day. According to AfDB about 60 percent of Africa’s middle class spend $2-$4 per day, subsisting just above the poverty line. Most of this group works in the informal sector. They are highly vulnerable to shocks and easily slide into poverty. The relatively stable middle class, spending more than $4 a day is about 128 million by 2010 estimates.

According to Global Pacific, a leading advisory firm, the proportion of Africans who occupy the global middle class is less than 5 percent and is scattered across the continent, concentrated largely in Algeria, Morocco, Tunisia, Egypt, South Africa, Botswana and Nigeria. Tiny pockets of the African middle class also exist in countries such as Kenya, Ghana, Ethiopia, Uganda and Senegal. The OECD believes Africa’s middle class comprises only 3.2 percent of the population.

Pundits have hyped the rapid expansion of Kenya’s middle class. For instance Aly Satchu Khan, an investment analyst believes that the mushrooming of malls is a sign of a growing middle class. But estimates of the size of Kenya’s middle class are all over the map.

The AfDB estimates that about 16.8 percent or 6.7 million Kenyans belong to the middle class, capable of spending $2 to $20 per day. The World Bank estimates that less than 2 percent of Kenyans belong to the global middle class, spending $10 and $20 a day. According to Kenya National Bureau of Statistics, 1 in 5 Kenyans is in the middle class, which includes individuals spending between $10 and $100 a day. That 1 in 5 Kenyans is the middle class is highly improbable because only 12.4 percent, about 5.1 million Kenyans, work for a wage, in the informal and the modern sector of the economy. This is according to figures computed by the World Bank, based on the 2009 census and the 2012 Economic Survey.  

In my view, contrary to the exuberance, Kenya’s middle class is small, pretty broke, and is not growing as fast as the talking heads would have us believe. Consider this. Just 6 percent of young Kenyans entering the labour force can find work in the wage paying modern sector of the economy. Unemployment is as high as 70 percent among school leavers and college graduates. What is growing rapidly is the rank of the educated underclass. It is growing faster than the middle class.

Something else is growing; debt driven consumption. And local banks are giving their all to grow personal debt among salaried customers. For example, the personal unsecured loan product has greatly increased access to cash for non-investment spending such as weddings, vacation, home improvement and purchase of automobile. In 2013, 389 billion or 25 percent of total loan disbursements were for personal use. The growing portfolio of personal loans is partly driven by high cost of living, inability to make ends meet, and low savings. And the net for consumption debt has been cast wider to catch those in the non-wage informal sector. M-Shwari, Safaricom’s mobile phone micro credit and banking services disbursed 7.8 billion in loans over the last 15 months.

The bulging ranks of a young educated underclass are worrying. To bring the underclass into the middle class, Kenya must ensure that fiscal and social policies, which support robust economic transformation, beyond headline GDP growth are in place. Transparency and fiscal discipline must be enhanced. It is a large and stable middle class, not the extractive sector that will drive economic growth and shared prosperity. Greater investment in employment-generating sectors remains a critical requirement. Most of all the government must ensure public sector efficiency through a lean and well-paid public sector, especially the police and teachers. 

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