The Emerging Middle Class and Its Effect on the Nigerian Economy

The Emerging Middle Class and Its Effect on the Nigerian Economy

The global middle class is currently made up of $2.3 billion people who spend about $7 trillion annually; this population size is projected to grow by 47% to reach $4.9 billion. This rise has caused a change in the economy in that business demand has increased to meet the needs of new consumers. The growth in middle class has caused a demand for goods such as cosmetics, automobiles, cell phones as well as an increase in the demand for banking services. The middle class in the US and other G7 nations has been the key source of demand in the global economy in the last 50 years; however, the recent growth of the middle class in the developing world has caused a change in this trend as Asia and Africa also account for a huge percentage of the global economic growth. Figure 1: Growth of the Global Middle Class Population (millions) 6 5 4 3 2 1 0 2010 2012 2030 Years According to the African Development Bank (AFDB), the middle class can be defined in relative or absolute terms. In relative terms, the middle class is defined as individuals or households that fall between the 20 th and 80 th percentile of the consumption distribution or between 0.75 and 1.25 times median per capita income respectively. Using the absolute approach, the middle class is usually defined as individuals with an annual income exceeding $3,900 in purchasing power parity (PPP) terms or with daily per capita expenditures between $6 and $10. The middle class in emerging economies like Asia and Africa have continued to grow. The middle class now makes up more than 40% of the developing world s workforce and is forecast by the International Labour Organization (ILO) to account for more than 50% by 2017. The Middle Class in Africa Many years ago, economies in Latin America, Africa, India and China were stagnant, left billions in poverty and provided few opportunities for the vast majority of their citizens to build a better life. Fast forward to this decade and the global 1

economy has changed. Brazil is a creditor nation; China is the world s second largest economy; India is a hub of technological innovation; and African nations are beginning to manage their rich depth of natural resources more effectively. The result of this is a rising middle class that at the same time will consume more, become more aware of their impact on the earth and will help spur economic recovery beyond borders of the countries in which they live. According to a report from the AFDB, the number of middle class Africans has tripled over the last 30 years to 313 million people or more than 34% of the continent s population. The reason for the increase in size and purchasing power of the African middle class includes strong economic growth and a more stable, salaried job culture away from traditional agricultural activities. Figure 2: Growth of the African Middle Class (1980-2010) Population (millions) 350 300 250 200 150 100 50 0 1980 1990 2000 2010 Years Although the growth in the middle class population has translated to positive outcomes for the continent s economy, about 60% of this middle class (approximately 180 million people) are barely beyond the poor category. They are in a vulnerable position and face the constant risk of dropping back into the poor category in the event of any external shock. The ICP results of 2005 showed that Africa s middle class per capita expenditure increased almost two-fold compared to more marginal increases in other regional economies in the developed countries. Consumer spending by the African middle class reached an estimated $680 billion in annual expenditures in 2008. North African countries have the largest concentration of the middle class among their population. Tunisia has the highest at 89.5% followed by Morocco and Egypt at 84.6% and 79.7% respectively. In Nigeria, the middle class accounts for about 30% of the population with the majority living in urban centers. This segment of 2

Figure 3: Africa s Population Distribution by Income 11% 19% 36% Poor (<$2/day) Floating ($2-$4/day) Lower Middle Class ($4-$10/day) 10% Upper Middle Class ($10-$20/day) 24% High Income (>$20/day) the population is responsible for a huge proportion of the increased spending on consumer goods, therefore improving the state of the economy. The Emerging Middle Class in Nigeria Nigeria s new middle class has emerged along with growth of the private sector in other sectors like banking, telecommunications and services. This middle class population is largely located in the urban centers, particularly Lagos. The purchasing power of the new middle class in Nigeria can be observed at some shopping malls that have recently been opened around the country. The growth in middle class in Nigeria follows the rise in the country s national income. For instance, Nigeria s Gross Domestic Product (GDP) increased five times from $46 billion in 2000 to $247 billion in 2011, while GDP per capita has increased to about $1,600. Similarly, the country s population has increased by about 33% during the same period rising from 119 million to the current estimated 160 million. Characteristics of the Middle Class Nigerian The middle class tend to reside in bigger and more permanent dwellings equipped with modern amenities. In terms of asset ownership, they are typically associated with the widespread ownership of major household goods durable goods such as refrigerators, telephones and automobiles. 3

They are more likely to have salaried jobs or own small businesses. They tend not to rely entirely on public health services and seek more expensive medical care when ill. They usually have obtained post-secondary education and are very interested in their children s education. They are more geographically concentrated in the urban areas. They are more likely to have values aligned with greater market competition and better governance, greater gender equality, more investment in higher education, science and technology than those of the poor. Factors Driving the Growth of the Middle Class Economic growth Growing private sector Job opportunities High tertiary school attendance Effects of the Middle Class on the Nigerian Economy Income elasticity of demand greater than one: this means that there will be an increased demand for luxury goods. For example, an 8% increase in income might lead to a 10% rise in the demand for new car. The income elasticity of demand here is +1.25. Preference for product differentiation leads value added in branding: companies trying to perform better than competition will put in more effort to create differentiated products. This will lead to an increase in the amount of quality products in the market. Increase in positive values: the middle class population is usually a set of focused individuals who have the following set of values: hard work, saving culture, etc. The middle class populations are usually interested in economic policies and change in the society. They are more likely influence to economic development through more active participation in political process, expressing support for political and economic policies. 4

References A Survey of the Nigerian Middle Class,1004 respondents, Renaissance Capital, September 2011. Homi Kharas, The Emerging Middle Class in Developing Countries (OECD Development Centre), Global Development Outlook, 2010. Maria Gomez Leon, The rise of the middle classes and the economic growth in historical perspective: The Brazil s experience in the 20th century, Universidad Carlos III de Madrid, Department of Economic History and Institutions, 2012 Developing world s middle class is growing but so is its near poor, http://www. guardian.co.uk/global-development/datablog/2013/jan/30/developing-world-middleclass-growing, April 2013 5

Analyst Chima Onyewuchi Partner Chukwuka Monye editorial@ciuci.us Office: +234-1-903-5397 ciuci CONSULTING...to your future strategy, market research & training