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.

Finweek English Edition - - IN DEPTH - By Ciaran Ryan

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

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