Search Results for ‘informal bourgeoisie ’

Signs of Interdependency between the Formal and the Informal Economy

bridging economiesThere is a lot to be unpacked here – I made a mindmap of the urban African entrepreneur who is the backbone of the visible emergence of a consumer class. I’m drawing from my experience of the Kenyan context. I started this in response to Michael Kimani’s Storify recently on the mythical “middle class” and the African consumer market.

We know that this demographic, regardless of the efforts to label it “middle class”, is quite unlike the traditional bourgeoisie that built the developed world a century ago. We can call them the informal bourgeoisie – solid members of society who nonetheless break stereotypes of the white collar, university educated, salaryman.

More often than not, they are entrepreneurs and businesswomen, traders and makers, and workshop owners, who bootstrap their lines of business through the traditional means available amongst what is still called the informal economy. If they’re lucky they might have finished high school, or even graduated from university, but a degree is not a prerequisite as it might be in a private sector job.

In this post, I’m only going to write about something that struck me last night when I was staring at the mindmap. The line that links business to entrepreneur can also be considered a bridge between the informal economy and it’s business practices, and the upcoming formal markets of urban population centers.

The successful workshop owner or regional trader rapidly acquires the signals of his or her business success in the form of consumer goods and increased expenditure on staples and necessities, including upgrades to choice of schools and church. I believe that formal financial services and products such as bank accounts, credit cards, and various apps on a smartphone are part and parcel of this.

In effect, the entrepreneur is the link between the informal economy which provides employment and income to the vast majority, and the burgeoning formal sector in consumer facing services and products.

The formal economy is more likely to be dependent upon the health of the informal sectors than the reverse.

This interdependency, and relationship, is important. I will be coming back to this diagram again to unpack more of what I’m seeing here. For now, it’s enough to have figured out that initiatives meant to eradicate the “pesky” informal trade might have greater implications than initially assumed.

Assessing the size and value of investment opportunities with an informal economy footprint

There’s an interesting snippet from the Nigerian news yesterday that led to this framing of a necessary problem statement. KPMG’s head of private equity is quoted as saying:

Meeting current needs of the one billion plus population and, the future demands of the rapidly emerging middle class consumers will drive the next wave of Private Equity investment on the continent.

However, investors, according to KPMG, are keener to do business in sectors that have little to no direct relationship with government, or through structures that limit government control and undue influence.

This was the view of ‎Partner & Africa Head, Deal Advisory & Private Equity at KPMG, Dapo Okubadejo, who said that throughout the firm’s ongoing interactions with foreign investors, it was clear that concerns about ‘red tape’ and perceived corruption are still top of mind for investors who are looking to enter African markets.

Given that private equity investments are currently the hottest thing in key African markets, this shift in emphasis to more consumer facing sectors brings to light some unique challenges that investors will have to face beyond the oft mentioned challenges such as variability in quality of infrastructure and inadequate systems:

  • African consumers transact mostly (90-odd% in most markets) in cash.
  • Emerging consumer classes are more likely than not employed in informal sector activities, in small business and trade. This has impact on both their purchasing patterns as well as their cash flow regardless of income strata.
  • Services are mostly part of the informal sector.
  • Greater degree of retail formalization at the front end (B2C) is no guarantee of similar degree of formal structures at the back end (B2B). Distribution, delivery, payments – the entire supply chain – may have components from both the formal and informal sectors.
  • The role of personal relationships and social networks in the information ecosystem and impact on B2B and B2C decisions.

What does this actually mean, though, to the investment community?

A few years ago, Emerging Futures Lab had the unrivalled opportunity to work with Village Telco, a South African social enterprise whose corporate mantra emphasized open innovation. We can openly share our experience of qualifying, from the perspective of investment and potential for returns, an industry sector for which little or no market data is available due to its significant footprint in the cash based informal economy.

While the industry itself – cyber cafes or internet cafes – maybe in decline today due to the proliferation of affordable smartphones and data plans, back then it was a significant market opportunity for an innovative communications technology. Our task was to assess the size and dollar value of this industry and the market potential for Village Telco’s Mesh Potato device. This was complicated by the fact that not only had we to offer product pricing recommendations but we had to elicit purchase intent for an unknown product category.

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Implications for Investment in B2C

This experience was an eye-opening exercise in shedding light on assumptions made in traditional market analyses and pricing exercises.

When such a significant proportion of the industry is operating in the informal sector then many of the heuristic methods and frameworks either did not apply or resulted in skewed outcomes.

The assumptions underlying pricing, for example, focus on utility value, whereas we discovered the majority of informal sector businesses looked at revenue generation potential, intent on maximizing the returns on their capital investment in new technology.

The implications for risk and returns, as assessed by consumer facing businesses, are also influenced by the cash flows and patterns of the informal sector. When the majority of transactions are in cash, how does this influence decision making?

The specific business or industry itself that PE funds are considering may not be as informal as the internet cafe industry but any consumer facing business in this operating environment will face the implications of the propensity for cash.

To summarize the challenge for market assessment:

  1. Heuristic frameworks for market analysis developed in the context of more developed operating environments may not always offer accurate insights on potential for sales and market share.
  2. Assumptions made on purchasing patterns, pricing and buyer behaviour should not be left unquestioned, particularly if the industry segment has a significant footprint in the informal sector.
  3. Risk assessments may be skewed by the impact of the above two factors in the qualification of a market’s potential or industry viability.

Caveat:

Many of the most visible investments till date have been in FMCG such as dairy or biscuits but The Economist offer their opinion albeit without mentioning the increasing emphasis in the B2C space.

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Global emerging middle classes are Africa’s GEMs

Kentucky Fried Chicken at The Junction, Nairobi, Kenya  2011 Photo Credit: Niti Bhan

Bright Simons cautioned us about hyperbole and exuberance in a recent article published on the HBR site. In “Beware Africa’s Middle Class“, he points out with great clarity that the ’emerging market consumers’ spotted by the optimists over at the African Development Bank (AfDB) were nothing like the bourgeois conjured up by the prosaic “middle class” labeling. In fact, he says, university educated graduates were still looking for their mythical middle class job, all white collar and old school ties of course, while the economic engine was actually being run by successful entrepreneurs, smallholder farmers, opportunistic traders – most of whom were growing informal micro enterprises without having completed their educations due to financial pressures.

Here is what Simons has to say:

Across Africa, incomes are rising fastest among those engaged in brokering trade in goods and services across fragmented markets. These are the people who shuffle goods from one trade-post to the other, braving tattered roads, noisome customs officers, leaking kiosks (serving as warehouses), clueless laborers, and even more clueless technicians. As economic conditions improve across Africa, these folks are the first to know and the first to scale up their operations.

These are the importers who have never heard of a “letter of credit,” much less opened one, the “suitcase merchants” who travel to Dubai and the Far East every month to haul in cheap consumer goods on baggage trolleys, as well as their collaborators who stay at home to push the stuff in the open-air markets. These are the second-hand goods dealers and distributors opening up small towns to commerce. They are the vanguard of the African middle-class.

These people are rarely well-educated, though, and they share none of the cultural traits seen in the West and Asia as prerequisite to a middle-class life. Many young and educated Africans, on the other hand, share few of the economic traits associated with middle-class status elsewhere. Lacking a regular income and strong social networks, and bereft of the professional grooming and mentorship opportunities available to true middle-class types, they have become a monument to an educational system increasingly at odds with the social and economic realities of the new Africa.

This amazing contradiction in most African societies — of an expanding educated underclass and an ‘uneducated’ rising economic class — sums up why the African economy is struggling to acquire the characteristics one would expect of an economy bursting with middle-class vibes. Simply put, even were the number of middle-class people expanding as dramatically as some observers claim, there is no guarantee that market and consumer behavior would look anything like what emerged in other societies when their middle-class population begun to approach critical mass.

Naturally not. Bright Simons has hit the nail on the head. This emerging consuming class has none of the characteristics assumed as a given when considering the “middle class” household’s consumption patterns or preferences. Few credit cards or regular payslips may be present; the majority being one of the vast majority of Africans – 96% of all mobile phone owners – who are on cash only prepaid phone and data plans. While their incomes maybe too volatile for market researchers seeking to segment them into neat pigeonholes of disposable incomes, their activities are too dynamic to relegate them to the ‘bottom or base’ of any poverty indicator. In fact, these characteristics describe the bottom of the pyramid (BoP) consumer mindset and behaviour without the assumption that poverty is a steady state uninfluenced by aspirations.

Light fixtures installed and ready for future electric connection, Kitui, Kenya April 2013

This dynamism is a characteristic of the opportunity available at a certain point of time or when factors are just right, and it swings enough to allow the aspiring informal bourgeoisie to risk the additional investment in symbols of ‘having arrived’ – a much larger and tangible shift in daily life such as a vehicle upgrade (bicycle to motorcycle) or an LPG cooking stove to replace the charcoal. These are not simply the additional momentary cost of a brand name takeaway meal but usually imply an increase in household budget.

And these aspirations are very often signaled to the entire community, especially when they are one of the tangible class markers of clear upward mobility like a connection to the electric grid. It is not uncommon to see homes of the global emerging middle class all kitted out with wiring and fixtures just waiting for that last jump up for the brass ring.

These dynamic GEMs are far more likely to be representative of the Africa Rising narrative, than the now obsolete image of the ‘poor African’ villager.

Africa’s Middle Class: Development economics and marketing demographics conflating the holy grail

The most developed nation on the African continent, south of the Sahara desert, is considered to be South Africa with its financial and transportation infrastructure and systems, a legacy from history. In the first decade of the 21st century, the black middle class – known as Black Diamonds in marketer jargon – came into prominence on the back of numerous economic initiatives after the fall of apartheid.

img-south-africa-consumer-goods-02The rise of the Black Diamonds was meant to be the signal of a changing rainbow nation, one whose peoples would finally be included in the social and economic advancements long enjoyed by a privileged minority. This emerging middle class was also among the first to be noticed as African consumers in their own right, and their discovery pioneered the subsequent search for the now mythical African middle class. Even then, their total number was under scrutiny for its aspirational inclusivity versus actual households fitting the conventional definition of a middle class. From The Economist writing in 2007:

The University of Cape Town’s Unilever Institute of Strategic Marketing says there are now 2.6m “black diamonds”, as it calls the black middle class, a 30% increase in less than two years. Included in the definition are working professionals; those who own things such as cars, homes or microwave ovens; university students; and those who merely have the potential to enter these categories. The survey estimates that these black diamonds represent 12% of South Africa’s black adults, and make 180 billion rand a year ($26.2 billion), or 28% of the country’s (and more than half of all black South African) buying power.

For some, such as Lawrence Schlemmer, a sociologist in Cape Town, this definition is far too broad to be meaningful. He agrees that numbers are rising fast but argues that they are still tiny. Last year, he says, only 322,000 black South Africans (less than 1% of the black population of 38m) could be deemed “core” middle class, a far cry from 2.6m black diamonds.

Still, whatever their size, the buppies are affecting the economy and the political landscape.

This week, a comprehensive new survey by the South African government shows the on the ground reality in 2016. The National Income Dynamics Study (NIDS)‚ launched by the Department of Planning‚ Monitoring and Evaluation (DPME) in Pretoria surveyed 28‚000 people who were tracked every two years from 2008 to 2015. Very similar in fact to the recent household panel survey completed in India. Even their conclusions resemble each other:

According to the study‚ those in the middle class have a tendency to drop in and out of poverty.

And the size has not actually changed much since 1993 – the year before the fall of apartheid and the election of Nelson Mandela.

The study also shows that the South African middle class is much smaller than estimated‚ sitting at around 14.5% of the total population in 2014. Women are more affected by poverty, and even those who manage to climb the ladder may slip down again.

“…It has not grown much since 1993 — growing its share by only two percentage points in the past 23 years…”

20151024_mac237And, perhaps, the real challenge we face with the ongoing search for Africa’s middle classes is the conflation that took place back then between a consumer marketing segmentation and a socio-political demographic.  By allowing the aspirational reach of the consumer marketing driven research to inflate the size of the segment classified as middle class, it has given rise to an ongoing and complex muddle across teh entire continent. As the AfDB’s former president Donald Kaberuka said last year:

“I think we are wasting too much time on the definition of the middle class and the cut off point, it is a sterile debate.

“A dynamic middle class that rises with the sea increases domestic demand, the diversity of the economy, [its] resilience, and they also stabilise the politics of a country as well, since they have a stake in the system.”

He has a point. But perhaps not the one he intended to make. Instead, if we consider disentangling consumption and demand for consumer products from the increase in political voice and “stake in the system”, we may in fact discover that there is indeed a sizeable bourgeoisie emerging even though they may not possess all the qualifying criteria traditionally attributed to a middle class per se. (Previous posts on this topic have been tagged informal bourgeoisie)

There’s the demographic segment which is the middle, and then, there’s the conceptual body of solid citizens invested in the democratic stability and economic growth and development of their countries. As Jacques Enaudeau wrote in 2013:

But fixated on wealth, the discussion on middle classes in Africa misses out on the other two pillars of social stratification: social status and political power.

As soon as those two are factored in, discussing the “African middle class” as a homogenous entity seems absurd, and so it should. Thinking that what separates the senior civil servant from the street hawker or the country head of a multinational from the shop owner is a matter of daily expenditure amounts to looking at their reality through the wrong end of the telescope: the bigger picture is that they live in different worlds.

In the developing world, the formal sector with its white collar jobs populated by university graduates may jostle cheek by jowl with the informal economy’s life lived on the street but that proximity might be on the only thing they have in common.

For here lies the rub: the material culture that the notion of “middle class” posits as shared consciousness is articulated to a strong sense of individualism, which is borderline contradictory with the idea of class. All the more reasons for the analysis to consider the representations which members have of themselves as a group and the historical context in which such groups are being shaped.

This, however, is not the post to unpack those complexities of self image and collective consciousness. It’s one which pauses to ponder the newest set of findings on the dynamic nature of poverty and wealth in the more uncertain and volatile operating environments of the still developing world. And considers the South African example introduced today:

There has, however, been considerable demographic transformation within that band of the middle class, with Africans now outnumbering whites by about two to one, the report said.  Factors driving the surge include greater access to credit, improved education levels, BEE and improved economic growth until recently.

Transformation of societies is underway, just as the Indian researchers concluded in their analysis. This might be a much larger global trend underway, whose weak signals we’re just beginning to pick up now. I’ll be following up with these musings on the blog. The people with the real problem on their hands are the consumer companies looking to justify entering the African markets, and perhaps that’s a topic to take up in the next article.

My 2 shillings worth on the size or value of the emerging African middle classes

There’s been a lot in the news of late about the size and worth of the emerging African middle class subsequent to the release of an as yet unseen report by an economist, Simon Freemantle, at Standard Bank, South Africa. The various headlines conflict each other, some say the middle class isn’t as large as earlier reported, others say its growing at a rapid clip. Their tone seems to depend on which aspect of this alleged report they support.

Instead of simply defining the middle classes by available daily spending power, as the African Development Bank did back in 2011, when they first announced the emergence of these new consumers, the Standard Bank report goes on to assess households by using the South African Living Standards Measure (LSM) as a means to segment them. But because we have yet to find a copy of the actual report itself, only articles referencing it (via a press release, to hazard a guess), there is no clarity on whether the South African LSM segmentation was directly applied to the households under consideration or whether the LSM was adapted for regional, social and cultural differences.

Even the SAARF, the South African body responsible for this evaluation tool has been questioning the validity of the LSM as it is structured at the moment. There are a few different approaches under development, from what I can tell based on a quick search online, including one which seeks to regionalize the LSM so that it can be far more accurately applied across the continent rather than for South African conditions alone. Again, we are not sure which version has been used in this new Standard Bank report.

The bottom line is that the emerging African middle class may indeed be smaller than imagined, though growing rapidly, or, that its as large as the AfDB originally estimated. That is, we still don’t know the size and worth of this consumer market. I suspect the reason for this that we’re trying to measure volatility, the underlying characteristic of the informal sector’s income streams, and that is why the goal posts seem to keep shifting.

The OECD had once said that the global emerging middle classes of today are not the same as those that emerged after the industrial revolution and established the foundations of the highly industrialized nations of the so called ‘first world’. That these new upwardly mobile and aspirational consumers were in fact emerging from the population segment originally designated as the ‘base of the pyramid’ and were less likely to have university degrees or salaried jobs.

This was also the point that Bright Simons made in his HBR article, that while it was undeniable that there was an increasingly visible pattern of conspicuous consumption happening across sub Saharan Africa, it should not be conflated with the concurrent rise of a “middle class” as the term is commonly understood.

I would first ask why are we trying to put numbers on the size of the middle class?

Are we conflating the concept of an educated white collar bourgeoisie with the corporate need for market analysis required to estimate the size and value of a market opportunity before making the decision to invest or enter a new market?

And, if so, then are the two necessarily the same thing?