April 14, 2012

The Bedrock of Society - Understanding and Growing the MENA Region’s Middle Class

Results of Booz & Company’s regional survey expose trends and feelings about key lifestyle factors.

In developing countries worldwide, the middle class is often the catalyst for positive change, yet, in the Middle East, this substantial segment of the population is not enjoying the same opportunity. In fact, the Middle East’s middle class has become overly reliant on governments for jobs and services, which, when combined with weak social and economic infrastructures, has prevented this societal strata from advancing in a way that will help national economies become stronger. Experts from global management consulting firm Booz & Company, analyse recent survey results of 1,450+ middle class people in Egypt, Saudi Arabia, and Morocco to expose the issue, and determine how the situation can progress.

The Middle Class Serves a Key Function in Society
The creation and nurturing of a vibrant and sustainable middle class is critical to the future of nations in the MENA region. Its success is in essence the success of a nation, and its advancement brings ancillary benefits for social and economic groups, such as the poor.

Key Challenges for the Region’s Middle Class: The demographic segment in the MENA region differs from that in other parts of the world in one key way, as it is not a significant source of GDP generation or innovation.

“The middle class is a bellwether for a nation’s overall prospects, and its confidence in the economy can determine the future direction of that economy. Its trust in government and public institutions can serve as societal ballast during periods of disruption, just as a lack of trust in these institutions can trigger instability and social upheavals,” said Richard Shediac, a Senior Partner with Booz & Company.  

These issues present a major challenge for policymakers in the Arab world. They must work to expand the middle class, through social, economic, and political reforms that empower the private sector.

Shediac added, “Before they can tailor such reforms, however, policymakers must develop a better understanding of the middle class. To that end, the survey results shed significant light on this group—their aspirations, concerns, and anxieties. We also have some clear policy recommendations for government reforms that help address the current concerns of the middle class and help this demographic segment take its rightful place as an engine of future growth in the MENA region.”

Current Economic Outlook
Overall, middle-class respondents expressed dissatisfaction with their current economic prospects. However, respondents voiced general optimism about the future state of the economy. This perhaps reflects anticipation from several already-announced government spending initiatives and reforms in those countries, some of which have been spurred by events of the ‘Arab Spring’.

Job Market Concerns: The reliance on public-sector jobs shows up in answers about the criteria that middle-class respondents assess when choosing an occupation. Job security ranks most importantly, followed by a good salary. The fact that respondents seem to value job security over money by a two to one margin and, at the same time, do not value as much prospects of entering new business ventures or pursuing their professional dreams reflects either a sense of uncertainty about the future job market or—more likely—a tendency to avoid taking risks with one’s career.

“This is one of the fundamental challenges to the MENA region’s future growth. An overreliance on the public sector creates problems that are self-perpetuating: Economic volatility and structural unemployment become exacerbated by an oversized public sector, creating an economically constrained middle class,” said Samer Bohsali, a Partner with Booz & Company. “However that situation is unlikely to change as long as people prefer safe government positions to more lucrative (but potentially riskier) positions in the private sector, or—even better—launching their own company to fulfil their personal dreams.”

Cutting Back on Spending, and Struggling to Save: In terms of meeting basic expenses, an average of 57 percent stated that their salary covers such expenses with a little left over for extras. Another 13 percent stated that they live comfortably. However, of the remaining 30 percent, 27 percent stated that they are barely able to make ends meet, while 3 percent expressed an inability to do even that.

Entrepreneurs Are Feeling the Pain: More unsettling findings come from those who identify themselves as entrepreneurs, meaning they are self-employed or own a business. “About 25 percent have gotten out of business or had to relocate their company because of economic difficulties, and 21 percent experienced a decline in their real income, as a result of high inflation. Roughly a third expects to experience similar financial hardships in the future,” said Hatem Samman, Director of the Ideation Center, Booz & Company’s think-tank in the Middle East.

Food Inflation Is a Potential Threat to Stability: Respondents spend 30 percent of their monthly household income on food, beverages, tobacco, and personal care. Although this may reflect certain cultural and/or culinary aspects of the region, it also has greater relevance given recent increases in food prices that have ravaged the world—and MENA countries in particular—over the past several years.

Consumer Housing Is Stable, but Shortages Loom: Home ownership remains a bedrock desire among the middle class. A majority of respondents (62 percent) own their place of residence. However, the MENA region is experiencing increased housing demand from growing populations and rising urbanization, even as the supply of new housing has been constrained by limited access to capital and a lack of suitable land for construction. These factors have pushed up home prices, directly affecting low- and middle-income households.

Education, Healthcare, and Social Protection
“The hallmark of a developed nation is the extent to which it can provide for its citizens in a broader social context. Typically, this entails three core services: education, healthcare, and social protection,” said Samman.

Education: More than 50 percent of respondents think that the region’s education system does not provide opportunities for them or for their children, in terms of finding jobs. While middle Class Saudis seemed overly satisfied with Saudi Arabia’s educational opportunities with 72 percent expressing high or normal satisfaction,  the middle classes in Egypt and Morocco were far less content, with only 18 percent of Egyptians expressing satisfaction with educational opportunities provided by the government, and less than 10 percent of Moroccans.
Healthcare: Although the Arab world has significantly improved its healthcare systems over the last 30 years, the changing dynamics (reflected in an aging population, poor lifestyle choices and dietary habits, and increases in the prevalence of chronic diseases including diabetes and cancer) have put governments in a perpetual state of catch-up, as the demand for healthcare services has escalated.

Social Protection: A system of social protection—including a retirement pension scheme, unemployment insurance, and social safety nets—is essential for the middle classes worldwide, yet for many residents in the MENA region this is either lacking or economically unsustainable

Cultural Considerations
Survey responses regarding middle-class culture in the Middle East fall into four principal categories: trust in public institutions, the evolving role of women in the region, entertainment preferences, and the dreams and aspirations of the middle class.

Trust in Public Institutions: In the Middle East, trust in government is low. Less than 30 percent of the middle class rate the government well on key trust attributes, such as disclosing adequate and accurate information, fighting corruption, and having a fair and open court system.

Women’s Rights: In Arab countries in general, and the countries surveyed in particular, women’s rights have improved in education, the job market, and appointments to government offices. However, these changes have been slow in coming. Despite the conservative nature of the middle classes across the region, with 80 percent believing that the women’s primary responsibilities are at home, some 80 percent say that women should have a career or professional advancement ‘if they want to’. In other words, women should have the right to choose their path, not be forced into it.

Entertainment Preferences: Visiting shopping malls and going out to restaurants are at the top of the social agenda. Amusement and theme parks are also frequent options. Entertainment options that promote information and education, however, do not feature heavily in the entertainment profile of the middle classes in the MENA region.

Dreams and Aspirations: Principally, the middle class want a safe and secure country, with a strong and developing economy, and stability. Beyond that, they dream of excellent educational opportunities (for themselves and their children) and enjoying a happy life with family.

“There has never been a more critical time for policymakers in the Middle East to focus on empowering the region’s sizable—and politically significant—middle class. Recent protests by masses from all walks of life across Arab countries point to a common challenge: There is a dire need for change, via a set of economic, social, and political policies aimed at developing a large, dynamic, and sustainable middle class. Progress in the region will always be limited if half the population do not feel they have sufficient opportunities to succeed,” concluded Bohsali.

In tailoring these policies, governments cannot focus solely on economic issues. They must keep in mind the inextricable links between cultural advancements and economic progress. For example, when trust in government runs out, social disorder can ensue. Leaders should also ensure that any changes in the region create expanding opportunities for all residents, including women and youth. The strategic agenda most likely to succeed and build a healthy nation is one that balances development across economic, social, and cultural parameters—and meets the expectations of the middle class in order to earn their trust.