Africa's Missing Middle

What is Africa's missing middle? There are two, related answers: the missing middle class and the missing mid-sized firm. Both are important to promote economic development. A missing middle class also demands, and can help strengthen, political, civil, and economic rights. Here's a post from the Pew Global Attitudes Project on this point.

Why is the middle so much smaller in Africa than elsewhere? Lots of interrelated factors: poorer institutional environment, trade barriers that create disincentives to expand businesses, insecurity of various sorts, and (among other things) limited financing/insurance options for businesses that wish to grow and take risks.

There's no shortage of entrepreneurs in Africa -- just visit a local market and you'll see that. But the constraints these entrepreneurs face are like walls that keep most small and micro-scale entrepreneurs trapped in informality, generating little income, and employing few people. Only a small (though expanding) percentage of these business people have access to microcredit. Very few use commercial credit. Most are unbanked (though cellphone technology is helping to change this) and rely on friends and family to meet their needs for credit. Insurance is largely unavailable.

There are large business in Africa and they (along with government) generate most of the formal sector jobs. These business have access to commercial credit and insurance (or government subsidized financing) and so can undertake risky ventures. But in a difficult institutional environment (i.e., a risky, costly environment or an environment with a small domestic market and high costs to access other markets) these firms are relatively rare.

How might Africa's missing middle leap over the walls of institutional dysfunction so that more "early stage" investment takes place? Here's one take on an answer. The author, Brett Shere, offers three suggestions: 1) government incentives to entice venture capital; 2) recognize the social value inherent in many African business deals and add this value into the calculation of risk return; and 3) more financial intermediaries are needed to broker deals.

Here's a different post on the challenges venture capitalists face in Africa (dated but still useful). While private equity markets in Africa are relatively small, this article points out that they've been growing over the past several years. Nonetheless, real concerns remain and these are largely tied to the institutional and regulatory environment.

So how best to help develop Africa's missing middle? These posts do a nice job of capturing the divided sentiment in the development literature: it's the institutions stupid vs. it's the policies.

- Karol

Photo: Downtown Nairobi by Ben Stone