“A thriving middle class is the source of growth in a technological, capitalist economy. Investing in the middle class is the most pro-business thing you can do”…… Nick Hanauer
With 3.3 billion people in the global middle class representing the world’s largest group and the driving force behind global economic growth, this group is projected to reach 4.2 billion people by 2022 and will represent 53% of the world population, 5.2 billion by 2028, accounting for 62% of the 8.4 billion world population, the progress to reduce poverty is growing and it is projected that on average about 160 million people will join the middle class annually till 2021.
From 2017 to 2028, world population is projected to increase by 870 million (11.5%) while the projected population in the middle class will increase by 1.9 billion (57.6%), but majority of the population moving into the middle class will happen in the Asian continent. The precedent increase of the middle class has also fueled a booming world economy with increased consumer spending per household where GDP has grown from US$11.17 trillion in 1980 to US$80.68 trillion in 2017, a whooping US$69.51 trillion. At the same time world population grew from 4.43 billion in 1980 to 7.53 billion at the end of 2017 representing an increase of 3.1 billion in population, while the world population grew by 70%, the combined global GDP grew by 622% in the same 37 years.
The global goal of reducing poverty by moving a larger population into the middle class has been the strategy used by progressive nations to grow economy which has also propelled economic wealth and has now become the leading strategy amongst developing nations. Countries have come to realize the strategic importance of a growing middle class to economic growth, wealth creation, and sustainability.
Following the Global Recession of 2008, on December 6th, 2011 the then United States President, Barack Obama on his quest to reviving the economy and getting it going again, made a case for the Economy in Osawatomie, Kansas on why the Middle Class is strategic to the overall strength and sustainable growth of the Economy. The President made it clear that if The United States must have a stable economy then it must continue to empower and grow the middle class. It is the middle class that grows the economy and not the rich.
So who are the middle class?…They are the individuals and household who fall between the working class and the upper class within a societal hierarchy. They have higher proportion of college or university degrees than those in the working class, more income available for consumption, and may own a property. They are often employed as professionals, managers, and civil servants. While the United Nations uses the Global measures and outlines a middle class as someone who lives on US$10 – US$100, the African Development Bank (AFDB) which focuses on the African continent, measures the middle class as those who live on US$2 – US$20 a day.
In Osawatomie, Kansas, President Obama made it known that a weakened middle class will not only hurt those in the middle class category but hurts everyone by stifling the overall economic growth of the country because of the strategic economic role it plays, stating that “when the middle-class families can no longer afford to buy the goods and services that businesses are selling, it drags down the entire economy from top to bottom”. While politicians see the middle class as the gains that needs to be created from Economic growth, the middle class is actually the source of economic growth, stating that a strong middle class provides a stable consumer base that drives productive investments and those who supported President Obama’s claims presented data to prove the President’s points.
They argued that the United States Economy from 1947 to 1979, a period of 32 years, on average the middle class received 54% of the total nation’s income and the average Compound Annual Growth Rate (CAGR) for the economy during the period was a steady 3.7% per year. But between 1980 and 2010, the middle class received on average 46% of the nation’s income and the average CAGR dropped to an average of 2.7%, though a mere 1% drop but a difference of 1% over 30 years was a huge difference in the nation’s economic growth. At 3.7% the economy will grow more than 3 times its size and at 2.7% it will grow to about two and a quarter its size.
To illustrate this, the International financial organizations and multinational consulting firms have projected that Africa has the capacity to grow at an average CAGR of 4.5% till 2050 if the economies are diversified. Using Nigeria as a classical example and a GDP of about US$375.7 billion as at 2017, growing at an average of 4.5%, Nigeria’s GDP will hit US$1.605 trillion in nominal terms by 2050, but should the CAGR drop by just 1% to 3.5%, the GDP will reduce to US$1.169 trillion in nominal terms, a huge difference of US$436 billion with just 1% drop in CAGR over a period of 33 years. A loss of economic capacity and bigger than the present economy.
SO WHY THE MIDDLE CLASS!!…….
“A strong economy depends on a strong middle class”………Rahm Emanuel
A strong Middle class is the backbone of the economy, they are the major spenders and every economy depends on the spending power of the consumers. Of the five factors that makes up the aggregate demand (GDP) of an economy, consumer spending alone makes up two-third of the economy (66.6%), hence if consumer spending suffers it stagnates the entire economy. As the largest factor of the economy, it represents not just a major factor, but the pipeline to which every part of the economy gets their supply for survival, in the United States, Consumer Spending accounts for 70% of the national economy.
At US$375.7 billion economy, Nigeria’s consumer spending as part of the overall economy should ordinarily account for US$250 billion. This is the part of the economy that grows every other part, which is why when there’s a recession governments worldwide majorly focus on increasing consumer spending through fiscal or monetary policies.
A healthy economy depends on a growing and stable middle class, they are the drivers of entrepreneurship and innovation, while entrepreneurship is the foundation of most Micro, Small, and Medium Enterprises (MSME’s), making up 50% of the GDP of any economy, the MSME’s make up over 90% of all businesses contributing 60% to 70% of all employments. Innovation on the other hand is what pushes every economy beyond its potential to a new level helping introduce new products to the market and the middle class creates the demand for the products.
The middle class create jobs in an economy, so when the middle class are not faring well or are being stifled, MSMEs suffer, workers are laid off, and unemployment increases, and as unemployment increases it depresses the economy, it becomes a circle and ultimately leads to poverty trap where those who have falling below the poverty line are unable to lift themselves out of poverty due to unavailable enabling opportunities and business environments. With over 90% of all businesses and contributing 60% to 70% of all employment, the middle class can be defined as the major job creators of any economy, a strong middle class is a strong consumer demand for the economy, and a strong demand grows businesses and employ more people, a strong and growing middle class means more MSMEs, and more MSMEs means more jobs for the economy. The level of employment is a major factor that influences the demand for consumer goods in any economy.
While in Nigeria, MSME’s contribute about 48.47% to the GDP and as at 2015 was employing 60 million Nigerians from a total of 37 million MSMEs, a growing middle class and MSME’s becomes an allure to Foreign Investors because the middle class spending contributes a hefty chunk to the consumer spending of any economy and this increases foreign capital inflow into the country at the same time facilitating technology transfer. Increasing middle class also signifies decreasing income inequality and reduces crime and promotes security stability for the country, countries with security stability attract the most foreign investments, and Asian countries are beneficiaries of major capital inflow through foreign direct investments due to increasing middle class. A greater part of the insecurity Nigeria faces today is as a result of the diminishing middle class.
An increasing middle class is a major driver for education, the more the middle class in a country the more kids are enrolled in school, they value education, and more so important, parents from a middle class family never want their kids to do less if they are educated. A society made up of a growing number of middle class means the bracket of income inequality is smaller, and equality promotes investments in education and such societies tend to invest more in public goods which further benefits the whole society by continuously closing the gap of income inequality. With about 13.2 million kids outside school in Nigeria, it is a strong evidence of a diminishing middle class and as the kids gets to adult age, this will lead to weak consumer demand and also lead to unemployment in future.
Joseph Stiglitz, a renowned economist and Nobel Prize winner also pointed out that the wider the income inequality is in a country the less the country will take collective actions to improve public goods which includes education and health. Countries with a higher number of middle class and lower income inequality tend to spend more on education and healthcare, research has also shown that countries that spend more on education tend to achieve more results through what is called the knowledge economy investing time and resources on research and development which leads to manufacturing, better process management, and efficiencies!!!…….. This is the foundation of most economic super powers of today.
President Obama in his speech argued that a growing and strong middle class promotes and boosts economic growth through better governance, stating that high and increasing inequality will create problems and challenges for democracy by distorting it through “an outsized voice to the few who can afford high priced lobbyists and unlimited campaign contributions”. These few hold brief for the interest of a selected few, but a well-educated middle class stands to challenge governance, formulate and promotes efficient and honest delivery of government services through good policies that eventually leads to better economic freedom and ultimately leads to sustainable economic growth boosting investors confidence, but a weak middle class is the direct opposite where government is unable to deliver the basic needs to its citizens.
As Consumer spending diminishes, revenues of most companies are affected, and as revenues drops, companies basically switch to survival moods and have to cut down on employees to maintain profit levels to remain in business, hence unemployment increases in the economy. This is part of what has been driving up unemployment in Nigeria, the middle class is a critical economic and social developer for any country, creating a stable demand for local and international products, and when they are unable to create this demand, it weakens the economy.
In January 2018, the NBS released its report stating that the Gini Coefficient which measures inequality worsened from 2004 to 2013 from 0.356 to 0.41, surprisingly this was the period Nigeria had its biggest economic growth, which meant most of the wealth was accumulated in the hands of a few rich people. The Gini Coefficient only dropped to 0.391 in 2016 as stated in the report, why?…..it is simple!!!….while population living in poverty did not reduce to close the gap but actually increased, the wealth which the rich had access to reduced and coupled with reduced oil prices.
The report also stated that national income/expenditure of the upper class (the rich) which makes up only about 10% of the population had been rising between 2004 and 2013, reaching 59.42% in 2013 and declined slightly to 58.39% in 2016, while the middle class accounted for just 30.26% in 2016 from 29.14% in 2013, a slight increase, while the lower class accounted for 11.36%. What is basically happening is that with a weak middle class, the rich makes most of the spending in dollar terms compared to what the middle class spends, while the middle class that grows the economy and not the rich, a weak middle class means big challenge for the economy.
In 2017, with a combined global GDP of US$80.68 trillion, global middle class spending was about US$37 trillion accounting for 45.8%, while in 2014 the combined spending of the Africa’s middle class was US$860 billion with a combined GDP of US$2.47 trillion representing 34.8%. At 30.26% in 2016, Nigeria’s middle class spending is way below that of the world and African average.
Driving Economic Growth Through Strong and Increasing Middle Class!!…
Most striving and stable economies are those that have continuously grown the numbers of their middle class, increasing consumer spending and attracting FDI’s. Today, China is the second largest recipient of Foreign Direct investment in the World after the United States of America, with US$168.2 bn in 2017 and reaching an all-time high of US$290.9 bn in 2013, as companies target the growing middle class for business expansion and growth, with over 420 million strong middle class and combined spending capacity that will account for 16% of world middle class spending by 2020.
Of the 4.518 billion world population in 1981, according to the World Bank, 2.38 billion (52.7%) lived in Extreme Poverty in developing countries, income of US$1 per day or less (in 1985 purchasing power parity dollars), but the world has also made a tremendous and significant progress in reducing Extreme Poverty, as of November 2018, about 630 million people now live in Extreme Poverty worldwide US$1.90/day at 2011 Purchasing Power Parity representing 8.3% of the 7.62 billion world population. While Poverty may be reducing in the world, some countries including Nigeria, are increasing in Poverty.
Before the 90’s, most Asian countries accounted for the highest number of Poverty and Extreme Poverty in the world. In 1981, according to the World Bank, the countries of South Asia with a combined population of 922 million had a total of 566 million (61.4%) of their population living in Extreme Poverty. By 2013 at 2011 Purchasing Power Parity of US$1.90/day Extreme Poverty had reduced to 256.5 million (15.1%) of the combined population of 1.699 billion. The South Asian countries had been able to lift 309.5 million out of poverty and added an additional 777 million to the middle class through increase in population over a period of 32 years.
The success for Asian countries still lies ahead, it is estimated that 88% of the next one billion entrants into the middle class will come from Asia continent and will lead the world in GDP growth, 350 million from China, 380 million from India, 210 from the rest of Asia while 130 million from the rest of the world and middle class spending from the current US$37 trillion will reach US$64 trillion by 2030 and will represent one-third of global economy.
In East Asia/Pacific the reduction of Extreme Poverty and building up the numbers of the middle class was even more successful, the counties of East Asia and Pacific had a combined population of 1.582 billion in 1981 with 1.234 billion (78%) living in Extreme Poverty, China alone had 84% of its population of 994 million people living in Extreme Poverty about 835 million. By 2013 the headcount living in Extreme Poverty in East Asia and Pacific at 2011 Purchasing Power Parity of US$1.90/day had reduced to 78.82 million, (3.5%) of the 2013 combined population of 2.252 billion. China alone lifted 789.5 million people out of poverty as at 2017 and has helped in boosting economic activities.
The three major regions where Poverty was really prevalent in the world reduced poverty and lifted people into middle class, but the most successful regions had the highest growth in GDP per Capita. In East Asia/Pacific where the increase of the numbers of middle class was most successful, the average GDP per Capita increased from US$1,263 in 1981 to US$10,370 in 2017 (721%), this region included countries first world like Japan and Australia which helped boost its GDP Per Capita in 1981. While South Asia increased its average GDP per capita from US$268 in 1981 to US$1,841 in 2017 (587%).
Sub-Saharan Africa which had a lower percentage of people living in poverty in 1981 (52.8%) of the total population, had a better GDP per Capita than South Asia with an average GDP per Capita of US$692 in 1981, and only increased to an average of US$1,554 in 2017, an increase of US$862 (125%). Sub-Saharan Africa could only reduce poverty from 52.8% of the total population to 41% in 2013, but at the same time the region had the highest growth rate in the world. Despite the fact that the percentage living in Extreme Poverty had actually reduced, the headcount in Sub-Saharan Africa increased as population increased. South Asia has been able to lift more people out of poverty into the middle class hence the boost in economic activities and wealth creation.
For Sub-Saharan Africa to grow and expand its economies like the success recorded in the Asian continent, it must lift people into the middle class by investing in them, and the continent must make use proceeds of its vast mineral resources by investing it on its people. Looking at a country like Nigeria that was ahead of majority of the countries in Asia in 1981 with a GDP per capita of US$809 has only been able to increase its GDP per Capita to US$1,969 in 2017, expansion of 143% in 37 years because of a diminishing middle class.
The increasing and thriving middle class has continued to grow and expand Asia’s economies, China’s GDP per capita has grew from US$197 in 1981 to US$8,827 in 2017, expanding by 4,381% in the same 37 years. Indonesia increased from US$566 in 1981 to US$3,846 in 2017 (580%), Malaysia from US$1,769 in 1981 to US$9,945 (462%), and Thailand from US$721 in 1981 to US$6,594 in 2017 (815%). Despite good policies to grow the Asian economies, the success lies with the fact that a strong consumer demand was created by moving people from poverty to the middle class. Nigeria which had fewer people living in poverty both in percentage and headcount in 1981 and had more middle class as a percentage of the overall population had a higher GDP per Capita than most Asian countries then.
As people are moved out of poverty, the middle class is created, income increases and increased income is able to boost consumer spending in the economy causing a chain reaction to other aspects of the economy as more businesses and jobs start to spring up. This has shown in most Asian countries, a region that was the Poverty Centre of the world in 1981, of the 2.38 billion living in Extreme Poverty in the world in 1981, which was 52.7% of total world population of 4.518 billion, South Asia and East Asia/Pacific accounted for 1.78 billion (75%) of the total.
NIGERIA AND THE MIDDLE CLASS!!….
“No matter how wealthy a few plutocrats get, we can never drive a great national economy. Only a thriving middle class can do that”……Nick Hanauer.
As at 2010 estimate, according to The World bank, 70% of the Nigerian population lived in poverty, today the 70% is still used to measure the poverty line in Nigeria and as at the end of December 2018 The World Poverty Clock estimated that 90.6 million (46.4%) of Nigerians live in Extreme Poverty. Those who live in Extreme Poverty live on equivalent of $1.90 or less per day (2011 Purchasing Power Parity), and those living in Poverty are basically those whose basic needs are meet, but just barely. With more people being added to extreme poverty and total head count of people living in Poverty Increasing, it means Nigeria has a diminishing middle class.
In 2017, IntelServe Inc. Canada, a business consulting firm carried out a research on why poverty was increasing in Nigeria and why people were basically getting into what is called the poverty trap, a mechanism that makes it difficult for people to escape poverty, the Poverty Trap is created when an economic system requires a significant amount of various forms of capital in order to earn enough to escape poverty, and what the government must do to help the people get out of the poverty trap and build wealth.
The research discovered why the middle class has been slipping into poverty despite the fact that the country recorded economic growth or expansions and recessions over the years and why the Asian countries were able to lift their citizens out of poverty while recording economic growth. Of over 300 middle class families that were surveyed using household income and expenditure, about 99% had the same challenges and problems, the major factor being governments lack of investments in public goods, mainly education and healthcare and most importantly the underfunding which has led to the destruction of public education and introduction of private schools and how private schools have become the major drain pipe on the average household income of the middle class leaving most with a crippled consumer spending power after each school fees season and barely having enough to meet household expenditure with no extra spending power to invest in growing household wealth.
The major reason for this can be seen in the gross savings of the country, Nigeria’s gross savings averaged 18.03% in 36 years, from 1981 to 2017. The Gross Savings is the gross national income less the total consumption plus net transfers, in other words gross savings is the difference between disposable income and consumption…..basically what is left between your take home and your expenditure. This means that on average, a Nigerian should have 18.03% as gross savings from their take home after expenditure to save and create household wealth that they can build up over the years through different types of investments.
This is where it gets interesting, according to The World Bank, the average saving rates in developing countries which includes: Upper Middle Income Countries, Lower Middle Class Countries, Low Income Countries, and the Least Developed Countries is 20.5%, what this implies is that to get out of poverty, a family needs to invest an average of 20.5% of their annual income over time to create wealth. At 20.5%, Nigeria is already below the world average, but where it gets worrisome is what happens to the 18.03% average gross savings per family.
According to the research, an average middle class family in Nigeria spends an average of about 24.5% of their annual income on private schools for their kids. The research was carried out on families having between one and four kids and depending on the level of income and preferred private school. Families with four kids spend as much as 38% of their annual income on education while those with one kid spend as much as 12%……so the middle class which is supposed to grow the economy has no extra spending power due to lack of governments sufficient investments in the education sector. So why a case for public goods such as education and healthcare?.
Education fall under what is called merit goods, and merit goods are good the government gives to the people irrespective of the fact that they can afford them, because if it is not given free, the goods will either be paid for or under consumed, and their under consumption or being paid for has both social and economic consequences for the country. Such consequences include increasing poverty, stifling the growth and spending power of the middle class, lower consumer demand and consumer spending, and lagging MSMEs due to lack or insufficient injection of funds. External benefits are a major advantage of education, including rising incomes, present and future generations are able to benefit from productivity, and reduction of unemployment through occupational mobility.
Merit goods create positive externalities with third party spillover benefits increasing significant effects on social environment. When merit goods and services are under-consumed under a free market condition it leads to market failures, and this is the classic case of what is happening to Nigeria, today there are about 13.2 million kids outside school up from 10.5 million in 2013, the future consequences to the economy will be huge through increasing poverty, diminishing middle class, low consumer spending, and unemployment due to lack of available skills. The moment Nigeria destroyed its public schools and the mass migration of the middle class to the private schools was the beginning of the slow death of the economy.
So why are the Asians lifting people out of Poverty?…..it is simple!!….apart from the policies of the government, a critical look at the gross savings explains it, for example China’s average gross savings from 1982 to 2017 was 42.1%, which means that the average person in China has 42.1% of their annual income to save and invest to escape poverty while enjoying the privileges of merit goods from the government, while Nigerian’s are battling with school fees, the middle class is getting quality and free education in China and other Asian countries are doing same. Indonesia’s average gross savings in 37 years was 25.7%, Thailand had an average gross savings of 29.3%, and Malaysia’s averaged gross savings of 32% in the last 37 years. Note that all these countries are well above The World Bank’s gross savings average of 20.5% for developing countries.
The higher the developing country’s gross saving and the ability to provide merit goods, the more successful the country in getting people out of poverty to build a strong and sustainable middle class that grows the economy. While some countries in Africa are increasing their middle class by moving people out of poverty, Nigeria seems to be doing the opposite by diminishing the number of middle class as they continue to fall below the poverty line.
From 1981 Poverty and Extreme poverty has been on the rise in Nigeria creating a weak consumer demand and a struggling economy that only depends on oil revenue, as the percentage of population living in poverty increased from 54.4% in 2004 to 70% in 2010, moving more people from the middle class down below the poverty line and global oil prices dropping in 2008 to as low as US$34, coupled with the global recession, unemployment in Nigeria rose to 19.7% due to weak consumer demand and consumer spending. With global oil prices falling to US$45 in the first quarter of 2015, and as low as US$27 in the first quarter of 2017, consumer demand and spending is low as 46.4% about 90.6 million people have spending power of US$1.90 or less per day and 70% of the population about 138.8 million living just barely having their needs met.
In the last five years and with the diminishing middle class and fall in global oil prices, the economy has been facing an uphill task, while the devaluation of the naira has also made more Nigeria’s fall below the poverty line, about 76 million people out of the 90.6 million were already living in Extreme poverty as at May 29th, 2015 using the margin of average of 8,000 people added to Extreme Poverty daily by the World poverty clock, we then conclude that the middle class is being wiped out irrespective of both economic growth and recession in Nigeria.
In conclusions……First, to grow a sustainable economy, Nigeria needs the middle class because without the middle class there can be no strong demand in the economy and employment will only depend on prices of crude oil. Secondly, to create the middle class, government must come up with strong policies on how to reduce poverty as more people are falling into poverty daily and move the lower class into the middle class status, these policies must be centered on Human Capital Development to help with creation of individual wealth through the support of productivity from innovation and entrepreneurship, this will create products to be consumed locally and will cut down on importations which will lead to increase in the gross saving of the country. And lastly, government must provide merit goods to help Nigeria’s increase their household savings to enable them invest more and spend more in the economy to create demand and employment.
The answer to Nigeria’s economic growth lies with a strong middle class that can increase consumer spending, create consumer demand, thereby creating jobs and reducing unemployment. And like the British economist John Maynard Kayne had advocated during the great depression of the 1930’s that increased government spending and lower taxes will help stimulate demand and pull the economy out of the depression…..but we must not forget to understand that government must at least provide or meet the basic needs of merit goods to help the people with increased purchasing power to create and stimulate the demand.
Note: This article was written by Roman Oseghale and was published by Businessday Nigeria on February 15th, 2019.