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The Middle of the Pyramid - Dynamics of the Middle Class in Africa

The Middle of the Pyramid - Dynamics of the Middle Class in Africa

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Published by Bunmi Oloruntoba
The AfDB brief addresses the implications of Africa’s growing middle class for the African economy and for poverty reduction in the region. In particular, it argues that the middle class may hold the key to a rebalancing of African economies towards more dependency on domestic demand and away from a heavy reliance on exports, as well as to greater and
more efficient poverty reduction and inclusive growth. It presents evidence based on research and studies of 45 African countries.
The AfDB brief addresses the implications of Africa’s growing middle class for the African economy and for poverty reduction in the region. In particular, it argues that the middle class may hold the key to a rebalancing of African economies towards more dependency on domestic demand and away from a heavy reliance on exports, as well as to greater and
more efficient poverty reduction and inclusive growth. It presents evidence based on research and studies of 45 African countries.

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Published by: Bunmi Oloruntoba on May 08, 2011
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10/21/2012

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 African Development Bank
1
Prepared by Maurice Mubila, Chief Statistician (ESTA) and Mohamed-Safouane Ben Aissa (ESTA Consultant)under the supervision of Charles Leyeka Lufumpa, Director, Statistics Department (ESTA).
2
Birdsall et al, 2000.
3
Bhalla, 2009.
4
Banerjee and Duflo, 2007.
5
Mahajan, 2009.
CONTENTS
1Introduction2Definitional Issues,Data Sourcesand Methodological Approach for the Study3Africa’s EmergingMiddle Class4The Middle Classand TheirCharacteristics:a Profile5Factors Drivingthe Growthof the Middle Class6Conclusion
Mthuli Ncube
m.ncube@afdb.org+216 7110 2062
Charles Leyeka Lufumpa
c.lufumpa@afdb.org+216 7110 2175
Désiré Vencatachellum
d.vencatachellum@afdb.org+216 7110 2205
 AfDB
Chief Economist Complex
Market Brief
 April 20, 2011www.afdb.org
e Middle of the Pyramid:Dynamics of the Middle Classin Africa
1
1Introduction
1.1Empirical evidence shows that growth of the middle class is associated with bettergovernance, economic growth and povertyreduction. It appears that as people gainmiddle class status, they are likely to use theirgreater economic clout to demand moreaccountable governments. This includespressing for the rule of law, property rights anda higher quantity and quality of public services.1.2Strong economic growth in Africa overthe past two decades has been accompaniedby the emergence of a sizeable middle classand a significant reduction in poverty. Alsorising strongly has been a robust growth inconsumption expenditures as a result of thisgrowing middle class. Consumption in thecontinent now stands close to a third of Developing European countries.1.3Fostering the growth of the middle classshould be of primary interest to policy makers. The middle class is a strong medium and longterm development indicator, partly because itsgrowth is strongly associated with fasterpoverty reduction. In a region with a substantialnumber of the world’s poor, this associationprovides an opportunity for countries in theregion to translate the recent impressivegrowth into even greater poverty reduction byharnessing appropriate policies.1.4The brief addresses the implications of  Africa’s growing middle class for the Africaneconomy and for poverty reduction in theregion. In particular, it argues that the middleclass may hold the key to a rebalancing of  African economies towards more dependencyon domestic demand and away from a heavyreliance on exports, as well as to greater andmore efficient poverty reduction and inclusivegrowth. It presents evidence based onresearch and studies of 45 African countries.
2Definitional Issues,Data Sources and theMethodological Approach for the Study
What is the Middle Class?
2.1The middle class can be defined inrelative or absolute terms. In relative terms,the middle class is defined as individuals orhouseholds that fall between the 20th and80th percentile of the consumptiondistribution or between 0.75 and 1.25 timesmedian per capita income, respectively
2
.Using the absolute approach, the middleclass is usually defined as individuals withannual income exceeding $3,900 inpurchasing power parity (PPP) terms
3
or withdaily per capita expenditure between $2 to $4and those with daily per capita expendituresbetween $6 and $10
4
.2.2The middle class is widelyacknowledged to be Africa's future, the groupthat is crucial to the continent's economic andpolitical development. But it is difficult to defineexactly who falls into this key group and evenharder still to establish how many middle classpeople there are in Africa. Recent estimatesput the size of the middle class in the region inthe neighborhood of 300 to 500 millionpeople, representing the population that isbetween Africa's vast poor and the continent'sfew elite. Africa’s emerging middle classcomprises roughly the size of the middle classin India or China
5
.
 
2.3It is also argued that Africa’s middleclass is strongest in countries that haverobust and growing private sectors
6
. Africa’smiddle class is not only crucial for economicgrowth but is also essential for the growth of democracy.
Definition of the Middle Classin the Context of this Study
2.4This brief uses an absolute definition of per capita daily consumption of $2-$20 in2005 PPP US dollars to characterize themiddle class in Africa. The study providesthree sub-categories of the middle class. Thefirst sub-category is that of the “floatingclass” with per capita consumption levels of between $2-$4 per day. Individuals at thislevel of consumption, which is only slightlyabove the developing-world poverty line of $2 per person per day (the second povertyline) used in some studies
7
, remain largelyvulnerable to slipping back into poverty in theevent of some exogenous shocks. Thiscategory is crucial because it is a hingebetween the poor and lower middle classcategory. This class is vulnerable andunstable, but it reflects the direction of change in population structure through time. The second sub-category is that of the“lower-middle” class with per capitaconsumption levels of $4-$10 per day. Thisgroup lives above the subsistence level andis able to save and consume non essentialgoods. The third sub-category is the “upper-middle class” with per capita consumptionlevels of $10-$20 per day.
Data Sources
2.5A variety of data sources were used tocreate the population distributions anddetermine the size of the African middle class(section 3). For African countries, the primarysource for the distribution data was obtainedfrom the World Bank’s PovcalNet database,which provides detailed distributions of eitherincome or household consumptionexpenditures by different percentiles basedon actual household survey data. In addition,PovcalNet provides information on meanhousehold per capita income orconsumption levels in 2005 PPP dollars.2.6The database primarily provides sampledistributions based on consumption except ininstances in which only income measuresexist. At lower income levels, the differencebetween consumption and income is small.But this difference tends to grow with wealthand thus should be considered a potentialmeasurement error in the analysis. Still weexpect that these differences are relativelyminor as there is a high correlation betweenincome and consumption especially at lowerlevels and thus should have little effect onoverall computations. We also focus onconsumption as it better captures individualwelfare and is less prone to fluctuationscaused by negative and positive shocks.2.7The data used in the identification othe characteristics of the middle class(section 4) was obtained mainly from the AfDB Data Platform database and otherinternational sources.
Methodological Approach
8
2.8The tabulated distributions and theirmeans are used to generate a Lorenz curvefor each country to show the share of incomefor each proportion of the population. Theline of equality depicts a situation of perfectequality in a society where a given proportionof the society would have an equally givenproportion of the income. The extremeopposite would be where an individual wouldhave all the income while everyone else hasnone. The Lorenz curve is normally used torepresent inequality in the distribution of income among the population. The furtherthe curve is away from the line of equality, themore unequal the income distribution is in asociety. The gini coefficient, also measureslevels of inequality, and is derived from theLorenz curve. It represents the proportion of the area between the line of equality and theLorenz curve and the total area above andbelow the Lorenz curve. The literature on theestimation of Lorenz curves provides anumber of different functional forms. Two of the best performers among them are thegeneral quadratic (GQ) Lorenz curve
9
andwhat may be called the Beta Lorenz curve
10
. There is some evidence for Indonesia that theBeta model yields somewhat more accuratepredictions of the Lorenz ordinates at thelower end of the distribution, though thesame study found that the GQ model is moreaccurate over the whole distribution
11
. TheGQ model, however, does have onecomparative advantage over the Beta model,namely, that it is computationally simpler
12
.2.9This study therefore uses the Betaapproach for estimating the various points of the Lorenz curve showing the proportion of the population and their share of nationalincome (see Box 2 in Appendices). Using asystem of six equations, each representing atrapezoid-shaped area under the Lorenzcurve for a series of coordinates, we obtainthree unique values representing theproportions of the population associated withper capita daily income levels $4, $10 and$20 (see chart 20 in Appendices). Theserepresent the “floating class”, “lower-middle”and the “high-middle” class categoriesdefined by this study.
3Africas EmergingMiddle Class
3.1 The results of this study reveal that Africa’s middle class has increased in sizeand purchasing power as strong economicgrowth in the past two decades has helped
 African Development Bank
2
 AfDB
e Middle of the Pyramid:Dynamics of the Middle Classin Africa
Market Brief • April 20, 2011 • www.afdb.org
6
Ramachandran, 2009.
7
See Ravillion, Chen, and Sangraula, 2008.
8
See Box 2 in the Appendices for more details on the methodological approach.
9
 Villasenor and Arnold 1984, 1989.
10
Kakwani, 1980.
11
Ravallion and Huppi, 1990.
12
Datt, 1998.
 
 African Development Bank
3
e Middle of the Pyramid:Dynamics of the Middle Classin Africa
Market Brief • April 20, 2011 • www.afdb.org
 AfDB
reduce poverty significantly and lift previouslypoor households into the middle class. By2010, the middle class (included floatingclass) had risen to 34.3% of the population—or nearly 313 million people—up from about111 million or 26.2% in 1980, 151 million or27% in 1990 and 196 million or 27.2% in2000 (Chart 1).3.2In the 1980s and early 1990s, therecruitment into the middle class resulted ina small percentage of poor householdsbecoming better off and entering the middleclass. This trend accelerated slightly duringthe period 2000 to 2010 when more poorhouseholds moved into the middle class. Atthe same time, the 2000s witnessed arecruitment process from the rich class intothe middle class, implying some slightimprovement in income inequality. However,income inequality in Africa remains veryhigh. About 100,000 Africans had a networth of $800 billion in 2008 or about 60%of Africa’s GDP or 80% of sub-Saharan Africa’s
13
.
Table 1: Summary of Middle Class in Africa by Sub-Classes
Floating class*Lower-Middle**Upper-Middle***Middle Class without floating classMiddle Class with floating class Yearin thousandsin thousandsin thousandsin thousands% of populationin thousands% of population
198049,31139,98421,96161,94514.6111,25626.2199070,77151,36229,30980,67214.4151,44227.02000101,68058,05636,56394,61913.1196,29927.22010190,58579,78542,910122,69513.4313,28034.3
Source: AfDB Statistics Department estimates.*Floating class ($2-$4), ** Lower-middle class ($4-$10), *** Upper-middle class ($10-$20).
13
World Wealth Report 2009, Merrill Lynch.
Chart 1: Distribution of the African Population by Classes

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