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AEC 2012 - The Making of the Middle Class in Africa

17-Oct-2012

This paper presents evidence on the making of the middle class in Africa by exploiting a comparable micro data from the Demographic and Health Surveys (DHS) for forty-two countries over two decades consisting of over seven hundred thousand household histories. Based on an asset index constructed from eleven different types of assets, the size of the middle class increased from about 5% to 15% in the last two decades and this result is consistent with an alternative estimate based on consumption expenditure computed in a companion paper by the African Development Bank (AfDB, 2011). We constructed a pseudo-panel to examine the dynamics of middle class in blocks of four periods covering the period 1990-2011. A key finding is that there was significant mobility of the middle class to the upper class (rich) in the last two decades with very little evidence of slipping back to poverty with obvious difference across countries. The paper approached the making of a middle class in Africa from institutional and policy perspectives. Initial conditions such as level of development in early decades, quality of institutions and most of all ethnic fractionalization play a significant role in determining the growth of the middle class in recent years. In addition we found evidence suggesting that the size of the middle class is higher in countries where mutual trust among citizens tends to be stronger. The role of education feature prominently in the making of the middle class. In about 30 of the 83 country-level regression decompositions we conducted for the asset index, the contribution of education exceeded 25% in explaining the overall variance in the asset index. The ‘premium’ (or ‘return’) individuals obtain from achieving primary, secondary and tertiary level of education is unambiguously high in the accumulation of assets in almost all countries. A policy of increasing the stock of education may be seen with caution however. The relative gains (or ‘returns’) with respect to asset decline for secondary and higher level of education as the proportion of people achieving the same level of schooling or mean level of schooling increases.

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