Monday, 22 September 2014

The Stanbic report is misleading, wrong

A REPORT published by the Standard Bank of South Africa last month is dishonest.  The report , Understanding the African Middle Class should be renamed Distorting the African middle class. It proposes that, nearly two decades of economic growth in Africa has had little effect on poverty reduction. 

This is the antithesis of the “Africa rising narrative,” whose thesis is that robust economic growth in the continent over the last two decades has reduced poverty and widened the middle income class. The Africa rising is an accepted narrative world- wide.

 The Understanding ….Africa report  states that, of the approximately 110 million households studied across 11 countries, 94 million (or 86 per cent) of them were located in the low-income category, suggesting poverty levels are as much as two times the figures shown in official records.

It defines Low-income people as those spending less than $5,500 in a year or $15 per day while the lower middle class spend up to $8,500 annually, or $23 per day. The middle class spends as much as $42,000 per year or $115 per day and the upper middle class spends more than $42,000 a year.  This contrasts the generally accepted definition of middle income class.

The study uses the Living standard Methodology. LSM is a census of one’s ownership of non-essential durable assets. This is the list of 24 variables we got from their so called LSM calculator Eighty20: Tap water in the house/plot, flush toilets, hot running water, built in kitchen sink, No domestic workers, home security service, 2 cellphones per household, 3 or more cell phones per household,  one or no radio, TV set,  Pay TV, Home theatre, Washing Machine, Microwave Oven, Deep-Freezer, air conditioning excluding fans, Swimming pool, Cars in Homestead, computer, laptop, telephone Landline, vacuum cleaner.
These are hardly basic necessities. necessities are defined to include, food, shelter, health, entertainment, clothes and education.

LSM was developed in South Africa by a foundation called South African Audience Research Foundation, SAARF.  It is a survey of assets held by households at the time of the census targeting high worth people for consumer good manufacturers.

 Needless to say LSM is a good example of a wrong policy tool as it ignores various variables employed in economic policy research. It relies on snapshots of wealth and income distribution at a given point ignoring changes that happen over time.  It also ignores completely the causes of changes in wealth and income distribution. It paints a picture of a caste system where one would remain stuck in in the same strata for life. According to LSM, the tool used in this study, being in the middle class is an event, not a process.

 This is in sharp contrast to a 2012 report by African Development Bank which established that there was significant mobility of the middle class to the upper class (rich) in the last two decades.  The AfDB report titled “The making of Middle class in Africa” found very little evidence of slipping back to poverty in Africa.  This is to say that robust growth has created employment and other income generating opportunities enabling the previously poor people to transit into lower middle income groups. This study presumes that being in the middle class is a process, with intercepts, mobility and further mobility.

The findings of this study which used the asset wealth status supports the findings of previous reports by the same institution using the consumption expenditure approach. The 2011 market briefing by AFDB, estimated the size of the Africa middle class to be 320 million people in 2011. The study, The Middle of the Pyramid: Dynamics of the middle class in Africa defines the middle class to be those between the 20th and the 80th percentile broken into three subclasses.  These are: floating class whose per capita consumption expenditure is between $2-$4; the lower middle $4-$10 and the upper Middle $10-$20. The rich are defined as those whose consumption expenditure per capita is $20 and over.

 It admits that the “floating class” comprising an estimated 194 million people was the largest sub-class. This class is vulnerable to exogenous factors, says the report.  Exogenous factors would include, economic slowdown, disruptions due to violence for instance and bad governance.  These have been few and far between. Consequently, owing to upward mobility, the few in this class have shrunk into poverty, if anything many have transited into higher levels.

Apart from the AFDB reports, other findings also put question the Stanbic Report. For instance Bloomberg in a recent review of Africa quoting various sources paints a rosy picture.  It shows a continent characterized by; robust economic growth, dominated by young people with a rising incomes which translates into huge and growing market for consumer goods including electronics, beverages, motor vehicles etc.

Such reports are in tandem with the World Bank’s report which credits Africa’s robust growth to strong domestic demand.  Last year, Sub-Saharan Africa’s GDP, excluding South Africa grew by 6 per cent. However, when the sluggish South Africa economy is included, GDP grew by 4.7 per cent says the World Bank’s Global Economic Prospects.

In the telecommunications, Africa is billed as the largest market for mobile phone handsets in the world. The continent also boasts high cell phone penetration rates. In east Africa for example mobile penetration has surpassed 60 per cent. In Kenya it is 78 per cent, in Tanzania it hovering around 65 per cent while Uganda has surpassed the 50 percent mark. These are indicators of a prosperous society.

 Other observed evidence also disputes the findings of Misunderstanding Africa. Traffic jams on our roads suggest a growing population of motor vehicles. Motor vehicles are purchased by a prosperous society.

 Two more issue with the Understand the African middle class report. It places no premium on education as an asset. The world over Middle class is defined as people with a tertiary education among other assets.


 And finally, its sample size was extremely large, 110 households in 11 countries. LSM is basically a survey of assets; did the researchers survey all households?  

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