THE (POTENTIAL) POWER OF THE MIDDLE CLASS
A recent study by Standard Bank reveals that the rising middle class will be significant for economic growth going forward. However, structural reform needs to occur in order to truly benefit from this segment of the population.
anew study by Standard Bank entitled Consumer Income Trends this week shows that 18% of working South Africans, close to 10m out of a population of 54m, now classify as middle class, up slightly from 17.5% in 2011. The middle class is defined by the bank as those earning between R49 001 and R783 000 a year.
That’s a pretty wide income gap, which the Standard Bank researchers segmented into four categories: Lower emerging middle income, earning between R49 001 and R109 000 a year; Emerging middle, earning between R109 001 and R234 000 a year; Lower middle, earning between R234 001 and R378 000 a year, and; Upper middle, earning between R378 001 and R783 000 a year. Blacks now outnumber whites in three of the four middle-income categories, confirming a trend highlighted in earlier studies on the size of the South African black middle class. These four categories make up the middle class, which generates nearly two-thirds of all income earned in the country, according to the Standard Bank study.
How to define middle class is the subject of endless debate, but by any measure SA’s middle class is now a force to be reckoned with.
Although it only accounts for 18% of the population, the middle class accounts for twothirds of all income generated in the country, according to Standard Bank. Given its economic clout, this is the demographic that is of most interest to business, and is a key metric for foreign investors.
In its 2015 Global Wealth Report, Credit Suisse estimated SA’s middle class at 13.7% of the population based on a wealth threshold of $22 000 (R326 700).
The Credit Suisse report defines middle class in terms of wealth in the form of property and other assets, rather than income. This wealth cushions the middle class against a potential loss of income through employment interruption, and is considered a reliable measure of middleclass status.
The Standard Bank study shows that about 53% of South Africans are considered poor (earning less than R49 000 a year), with blacks accounting for more than two-thirds of this number, followed by coloureds, whites and Asians.
Blacks comprise 80% of the population, but earn just 45% of total income in SA. White South Africans comprise 9% of the population, yet earn 40% of total income. Whites still account for more than half the affluent groups – those earning more than R783 001 a year – with blacks now
Although it only 18%accounts for of the population, the middle class accounts for two-thirds of all income generated in the country.
accounting for between 23% and 28% of highincome earners.
“This highlights South Africa’s stark inequality but also the importance of the growing middle class,” say the authors at Standard Bank.
Coloured people comprise 9% of the South African population, and this is matched by the income they earn, which is 10% of total income.
Indian South Africans comprise 2% of the South African population but earn 5% of total income of the country.
A 2015 report by the Institute of Race Relations (IRR) concluded that at most two out of 10 South Africans could be classified as middle class, based on a range of indicators, such as household spending, workplace seniority, educational levels, medical insurance cover, internet usage, property ownership, banking patterns, and appliance ownership. The IRR said it was more comfortable with a middle class size of 10% of the population, which would put it at about 5m.
The IRR report warned that the future growth of the middle class was imperilled by the current economic slump, meaning the public sector could no longer be counted on as an incubator for the black middle class. Only pro-growth economic policies would rescue the situation, and there is little sign of this happening. Free Market Foundation economist Loane
Sharp argues that the much-heralded rise of SA’s black middle class could pull SA out of its economic funk and alter the political fabric of the country.
He believes SA’s black middle class will continue to explode in the next seven years, creating a demand-led consumer boom that may drag the economy out of its current slump. It could also reshape the political landscape, as middle-class voters tend towards the political centre. The ANC would do well to heed these demographic realities and recalibrate its political compass to the centre, according to Sharp.
Sharp estimates the size of SA’s black middle class at 5.9m, based on metrics such as household spending, as well as estimates of those contributing to retirement funds, medical aid, and sending their children to private schools, including low-fee private schools.
He believes this figure could virtually double to 11.2m by 2022, notwithstanding the current economic slowdown, which poses some interesting political scenarios for the country. “The growth of the black middle class has been extraordinary over the last two decades, but we know from studying middle classes in other countries that they tend towards the political centre. If the middle class becomes disenchanted, you can forget about having a stable democracy.
“When looking at the middle class you have to take into account economic as well as sociological criteria. A key characteristic of the middle class is their concern for their children’s education as a way of escaping poverty, and this is showing up in the huge growth we are seeing in relatively low-fee private schooling in the country.”
A 2015 study by the Centre for Development and Enterprise estimated that a quarter of a million learners were educated
The muchheralded rise of SA’s black middle class could pull SA out of its economic funk and alter the political fabric of the country.
in low-fee independent schools in SA in 2014. Low-fee schools are defined as those charging less than R12 000 a year. At a time when enrolment in government schools is dropping, low-fee independent schools appear to be taking over, with enrolment growth of 14% between 2012 and 2014.
How will the middle class virtually double at a time when the economy is limping along? Sharp says an expanding pool of middle-class wage earners creates a virtuous circle of increased spending and economic growth. “The more people you have in the middle-income group, the more consumer activity you will see, and this in itself creates a massive pull on the economy, similar to what we saw in 2005 when we last experienced a consumer-led economic recovery.”
Prior to 1994, SA’s middle class was overwhelmingly white, the result of employment and other privileges embedded in the apartheid system. The emergence of the black middle class over the last two decades has been one of the primary drivers of economic growth over this period.
Sharp believes the middle-class phenomena will drag the country out of poverty over the next 35 years: “Based on these demographic trends, it is clear that poverty as we know it will be relatively non-existent by 2050.”
Not so fast...
John Loos, strategist and property economist at FNB, sees huge potential for growth in the middle class – regardless of race – based on the large number of low-income people in the country. “Whether the total middle class will double in seven years or not depends very much on one’s economic growth assumptions. The middle class can surely only grow noticeably in size if economic policies are altered to successfully grow the economy at a significantly faster pace than recent times. And this has to be done by sorting out the myriad of structural problems that have been repeatedly reported on over the past few decades.”
Loos adds that there are few signs of the positive structural changes needed in the domestic environment. It doesn’t help that the global commodity super cycle has come to an end.
“The larger the middle class, the better, because it serves as a key driver of political – and thus economic stability – whereas too much poverty can destabilise as social tensions are fuelled. So growing the middle class is indeed crucial. But it won’t happen that quickly at our current low economic growth rates.”
Loane Sharp Economist at the Free Market Foundation
John Loos Strategist and property economist at FNB