Understanding the Middle Class

It is very easy for me to cite, or better yet copy and paste, for you how the World Bank or International Monetary Fund defines ‘middle class’. Let us be clear, that is not what we are here for! We are here to put things into proper perspective, too often economics fails to address contemporary challenges because theory fails to meet practice. And if that is your interest, Google has more solutions than you can possibly absorb.

NHC Houses [Courtesy Business Daily]

NHC Houses [Courtesy Business Daily]

There is hardly any conversation about Kenya’s (and Sub-Sahara Africa’s) growth and economic outlook that misses a mention of ‘the growing middle-class’. But what really is the middle-class and why is its growth so important that it must inform everyday conversation? The appreciation of the middle-class and its role in growth and development is made all the more difficult when its immediate context is a society of pitiable disparities – with nearly 2/3 of the country’s Ksh 4.3 trillion economy controlled by a tiny clique of 8,300 dollar billionaires (0.02% of the population) whereas approximately 4 million Kenyans are grappling with starvation in an economy that has agriculture as its mainstay and 46% of the entire population survive on less that Kes 172 every day [New World Wealth Report 2014]. Does this even make sense?

Let us munch this cherry one bite at a time, shall we?

A very vital part of the size and growth of an economy is how much ordinary people like you and I consume in our day-to-day living (private consumption). So important it is that a key indicator of an economy in recession or depression is a consistent reduction in private consumption. Indeed, during the 2008/09 global economic meltdown, private consumption as a fraction of the size of USA’s economy is reported to have fallen from 70% to 65%[Beyond The Crash, Gordon Brown]. It is only through consumption that we create opportunities for wealth creation and accumulation. When you shuttle to town using a matatu and pay fare; when you catch a bite at a restaurant; when you get a hair-cut (hair-do) at the barber’s (salon); when you go to Memorial Park and part with Kes 20, that is how you stimulate the economy to growth.

Consumption, on its part, is determined by one’s income level. Better put, it is determined by one’s level of income after they have met basic financial obligations such as rent, school fees, loan repayment, day-to-day costs of food and transport et cetera. The income that remains and is available for additional, but not necessarily basic consumption, is disposable income. The higher the disposable income, the higher one tends to consume. This explains why persons with higher income than you tend to have property you do not have (say a vehicle or television set) and enjoy a higher standard of living than you do (say meat is part of the daily menu, while it features in yours once a week). Point is, they have a higher consumption capacity.

Kenya’s GDP growth versus Private Final Consumption growth [Source: BMI, World Bank Statistics 2014]

In the periods, 2000 – 2003 and 2008 – 2013, we can see the GDP growth curve tracking the Private Final Consumption as a percentage of GDP curve. The tracking is broken between 2004 and 2007 where we witness that the PFC curve nearly flattens off as GDP growth picks.

This can be attributable to a number of factors one being that during the period 2004 to 2007 (President Mwai Kibaki’s first term in office), economic growth was driven largely by government expenditure in infrastructure projects such as road network expansion and rehabilitation.

As indicated earlier, 46% of Kenyans survive on less than Kes 172 per day. The amount is barely enough to meet basic consumption needs; that is the category of abject poverty that is even unable to access the basic needs of food, shelter and clothing. Above them, is the low income category that has just enough income to meet basic consumption needs. They tend to consume all they earn and too often are caught in debt owing to consumption needs that exceed income ability.

Africa’s Middle-Class as a % of total population [Source: Africa Development Bank 2012]

Africa Development Bank defines middle-class as any person who spends between USD 2 and USD 20 per day. That effectively means that anyone who spends between Kes 5,332 and Kes 53,320 per month falls under the category of middle- class.

In 1980, the population stood at 111 million persons; in 1990 it stood at 151.4 million persons and in 2000 and 2011 stood at 196 million and 313 million respectively. The bank projects the number will swell to 1.1 billion people by 2060.

USD/Kes = 1/86.00

The middle-class is the bracket of the population that has a steady income that can meet basic and extraneous consumption needs, savings and investment.

1)  

The Middle Class, the Economy & Real Estate

Private consumption, government expenditure and investment are critical catalysts for economic growth and development. The more an economy is populated by persons with income high enough to consume, save and invest for wealth creation and accumulation the better it is placed to accelerate its growth. High income, consumption and investment within the local population not only enables an economy to grow faster but also to mitigate against external economic shocks that too often slow down growth. If, for instance, an economy Y is largely export driven to a particular market X; if market X suffers political unrest and is unable to import as much as it usually does, economy Y’s growth is decelerated.

The rising middle class in Kenya will play a central role in shaping the trends assumed by the real estate sector. Two points beg emphasis in this particular case:

  • Increased demand for housing as urbanization grows, especially with the new devolved structure of government taking shape, will be a pivotal consideration. Kenya’s urban population has risen from 19.9% in 2000 to 24.8% in 2013. It is projected that this fraction will further swell to 33.2% by 2030. How the economy furnishes this growing urbanized population with decent and affordable housing will be fundamental bedrock of the real estate sector in the next three decades.
  • Slums and informal settlements present a major crisis of rapid urbanization across the globe and especially in frontier economies. Indeed, Kenya is home to Africa’s second largest slum, Kibera. Slum upgrading initiatives should present a virgin opportunity for investors in the real estate sector in the decades to come. This is especially so in light of the growing preference for public-private partnerships in funding development projects.