Africa's Economy Surges As Middle Class Grows: Can Free Markets Meet Demand?


Finally, it seems that Africa is getting the attention it deserves. An Ernst & Young survey revealed last week that Africa received its largest share of foreign direct investment in 2011 (a 27% rise from 2010). This trend in FDI inflows, which currently stand at $80 billion, is expected to continue, reaching $150 billion by 2015. Increased investor activity in Africa is recognition of the strong and sustained economic growth displayed by the continent over the last few years; growth which has been spurred in large part by Africa’s growing consumer class. It is therefore not surprising that there has been somewhat of a scramble, by both local and international companies, to provide goods and services to Africa’s new consumers. While this is certainly a commendable strategy for growth, local and foreign actors should also look to pursue investment strategies that would tend to increase the overall size of Africa’s middle class.

To be fair, Africa’s middle class has thus far had few problems with growth. McKinsey’s 2010 report on Africa estimated that the number of African households earning $5,000 will grow by 80% between 2000 and 2014 and that the consumer spending, which stood at $860 million in 2008 will grow to about $1.4 trillion by 2020. Additionally, the share of African households with discretionary incomes, 35% in 2000, is expected to reach 52% in 2020. 

Numerous companies, both African and foreign, have attempted to piggyback on this development by aggressively marketing goods and services to this class. Sales of certain consumer goods (mobile phones for instance) have soared on the continent. RIM, makers of the Blackberry, which went through a bit of a slump in 2011 in its North American market enjoyed very different fortunes in sub-Saharan Africa. In South Africa alone, it commands 70% of market share. Even makers of high-end luxury goods, such as Porsche and LVMH Moet Hennessy Louis Vuitton SA, are finding business opportunities in Africa.

Tapping into Africa’s new found spending power has been good for growth on the continents. However, the strategy is not without its critics. Many African countries are still characterized by disproportionately large income inequalities. While they certainly contribute to growth, investments that seek only to market to the middle class, may also increase the perceptive distance between rich and poor. In addition to finding ways to make money off Africa’s middle class, African governments and foreign investors need to ask also, how they can increase the ranks of the middle class. That is to say, both local and international actors should look to also invest in ways that will not only make profit in the short term, but will also lead to widespread wealth creation and help sustain Africa’s long term growth.

One area that has lagged behind in Africa’s economic resurgence has been trade, particularly intra-African trade. Regional and continental economic integration has been hampered by lackluster development of "hard" and "soft" infrastructure. If African governments and foreign companies wish to continue to see the growth of Africa’s consumer class and continue to reap the benefits of this growth, they will need to also direct resources towards improving the continental infrastructure that catalyzes this growth. 

The United Nation Economic Commission for Africa’s (UNECA) 2012 Report notes that, “As countries urbanize and a middle class forms, demand for basic consumer goods and services will grow quickly — spurring economic development — yet capacity is not growing to be ready to meet this demand. Continental trade in services is only slowly liberalizing, hampering the ability of private service providers to exploit Africa-wide opportunities.” 

Trade in goods is similarly hampered by poor physical infrastructure, despite the enormous gains to be made from investment in this area. One study by Buyes et al. finds that an investment of $32 billion (including maintenance) to improve the main intra-African road network alone could generate trade expansion of around $250 billion over a period of 15 years. This would be good both for local governments and for private enterprise. Strategic public-private partnership is therefore needed to harness growing investment in Africa towards laying a strong foundation on which Africa’s current growth trends can be sustained.

It is not enough to simply acknowledge that Africa is emerging as an economic force and to find ways that benefit from this growth. We must also focus on how this growth was achieved, how it can be sustained and how it can be improved. McKinsey’s Africa report argues that, "the rise of the African urban consumer will fuel long-term growth.” 

Africa’s growing consumer class may however simply be the result of broader wealth creation emanating from investments in other areas of the economy. Provision of consumer goods and services is the investment strategy for the present, investing in vital infrastructure on the other hand is an investment in Africa’s future.