The Rising Influence of Rising Affluence

[DewDiligence]

A New Class of Consumers Grows in Africa (part deux)

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http://online.wsj.com/article/SB10001424052970204002304576627162908367154.html

›OCTOBER 13, 2011
By PATRICK MCGROARTY

JOHANNESBURG—Africa's middle class will triple to more than one billion people in the next half-century, but that still won't suffice to close the gap between the continent and Asia's new economic powers, a report from the African Development Bank says.

The report combines a bright outlook on growth—it predicts gross domestic product growth in the period of more than 5% a year for Africa, which has been a rare source of consistent growth amid the recent market turmoil—with stark warnings about a region at a pivotal point.

The continent's leaders must seize that momentum to avoid slipping into irrelevancy in the global economy, said Mthuli Ncube, the African Development Bank's chief economist. "Certain challenges need to be overcome for this dynamic continent to prosper," Mr. Ncube said in an interview Wednesday.

Industry is emerging too slowly, says the report—to be released Thursday—and Africa's small farms aren't equipped to make the shift to more commercial forms of agriculture. Meanwhile, an overdependence on natural resources—minerals and oil—leaves Africa vulnerable to turbulent commodity markets.

Building on the bank's earlier research, the report predicts Africa's middle class will continue an expansion that has captured the attention of multinationals. The number of Africans earning between $4 and $20 a day will balloon from 355 million people today—a number on par with China and India. That might seem low for inhabitants of many developed countries, but the bank says it is a level at which Africans can spend a bit on products or entertainment beyond the bare necessities of food and shelter.

By 2060, that number is expected to grow to as many as 1.1 billion, or about 42% of the continent's population by that year.

Relying on its own statistical research and data from other sources such as the World Bank, the bank produced upper-limit and lower-limit economic estimates to carry its projections so far into the future. Good governance, Mr. Ncube said, will likely push growth rates and development toward the upper end of the forecast—5.8%—while policy failures could result in worse results.

Not everyone believes Africa's middle class market is so large. The Organization for Economic Cooperation and Development estimates that there were 32 million middle-class consumers in Africa last year, or just 2% of the population. It defined those consumers as people who spent between $10 and $100 a day.

The World Bank makes yet another projection of 43 million middle class Africans by 2030.

Regardless, foreign companies see a new generation of consumers worth pursuing. In June, Wal-Mart Stores Inc. closed a $2.4 billion deal to acquire a majority stake in Massmart Holdings Ltd., with an eye to using the South African retailer as a springboard for the continent. That same month, Ford Motor Co. said it was planning to spend $500 million to expand engine production for its Ranger trucks at a factory near Pretoria. Yum Brands Inc. is planning to double its number of KFC restaurants in Africa by 2014.

Despite making the case for a big and fast-growing middle class, the African Development Bank says poverty is entrenched. By 2060, those living on less than $1.25 a day will still account for a third of Africa's population, down from 44% today. But because Africa's overall population will be nearly three times as large, the number of poor people will increase, it said. That mix complicates Africa's aspirations of prosperity.

The bank estimates Africa would need to grow faster than 7% a year to create enough jobs to lift more people into the middle class a feat China and India have accomplished in the past two decades.

The continent also needs to attract more global manufacturers. Many are looking to move out of China as costs rise, but executives complain that African transport and labor prices are already high—while skills don't measure up to those found in Asia.

"When China and India were developing, they were extremely low cost," said Charles Brewer, the package delivery service DHL's managing director for sub-Saharan Africa. By comparison, he said, "Africa has very high costs and very low productivity levels."

The bank blames Africa's education system. By 2060, 74% of Africans will be of working age, compared to 39% today. But there aren't enough universities or vocational schools to train those potential workers.

One area of optimism is the prospects for trade, both within Africa and with increasingly dynamic developing partners elsewhere. In the next 50 years Africa's most important trading partners will shift from the U.S. and Europe to "south-south" partnerships in the developing world, particularly in Asia. Just 27% of African exports will go to the U.S. and the European Union in 2060, compared to more than half today. And China alone will receive 25% of African exports, up from around 5% today.

"Developing countries have already become major players in global trade," the report says. "By 2060 they will dominate it."

Trade between African countries will also increase as infrastructure and regulations are harmonized across borders, the bank said. By 2060 governments will need to move beyond free-trade agreements to real integration of licensing, border control and visas, particularly small and landlocked countries that would be otherwise isolated from the global marketplace.

Boosting trade between countries is critical to cushion exporters from volatile demand for their commodities outside Africa, and in creating opportunities on the world's youngest continent for tens of millions of additional job-seekers. Without that integration and improvements in education, and agricultural reform, "the continent is likely to be overwhelmed by the challenges it faces," the report said. But decisive action could reap "significant improvements in the lives...of millions of Africans."‹