Does Africa need Germany’s Compact with Africa?

Does Africa need Germany’s Compact with Africa?

Two years after its launch, Germany’s much-hyped ‘Compact with Africa’ (CwA) initiative hasn’t managed to make much progress.

Two years after its launch, Germany’s much-hyped ‘Compact with Africa’ (CwA) initiative hasn’t managed to make much progress. At the recent G20 CwA summit in Berlin, German Chancellor Angela Merkel once again urged businesses to help drive a ‘self-supporting upturn’ in Africa’s fortunes by engaging with a venture that promotes macroeconomic reforms designed to stimulate growth and stem the outflow of migrants from the continent. Nevertheless, it appears that risk-averse investors seem reluctant to step up to the plate.

While twelve African nations have so far joined the compact, the German businesses that are so fundamental to its success haven’t been able to work up any enthusiasm for the project. With outcomes falling so far short of expectations, it begs the question: does Africa really need Germany’s help to develop?

German investors are looking for reassurances

Inviting investment via CwA represents more than a simple philanthropic gesture. Africa’s population is set to double in the next 30 years, so there’s potential aplenty for savvy investors looking for fresh markets. But while other European countries – such as France and the UK – are identifying and actively pursuing investment opportunities on the continent, German business leaders remain mistrustful of African business and political leaders, which – coupled with important business culture differences – causes them to shy away from a closer connection.

The problem is that tangible results are lacking. According to Robert Kappel, a German economist from the Institute of African Studies in Leipzig, many African countries have succeeded in creating a suitable business environment by improving governance and tackling corruption. However, inward investments have been few and far between. In fact, in the year after the launch of CwA, foreign investment barely rose at all, and the vast majority of investments went to just four countries: Egypt, Ethiopia, Morocco and Ghana. Nor have any new jobs materialised in a labour market that’s already swamped with job-seekers.

Making strides – without Berlin

At the same time, many other countries are just doing fine without Berlin’s grand bargain, which is putting the whole effort into question. For example, Senegal has been able to attract enough interest from foreign investors by creating a business environment conducive to economic growth – without Germany’s incentivisation. Under Macky Sall, the country has seen rapid economic growth and low public debt.

Senegal’s historical connections with its former colonial ruler has meant that French investments have always dominated. However, the last 15 years have witnessed a rise in interest from non-western nations including UAE, South Korea, China and India to the tune of around $5bn. As a result of Senegal’s increased political stability and its government’s commitment to establishing a business ecosystem that is attractive to overseas investors, inflows almost doubled to more than $500m between 2012 and 2017 alone.

The fact that Senegal is also a member of the Central Bank of West African States (its currency is pegged to the euro) reassures investors further and helps to position Senegal as a reliable jumping-off point for further expansion on the continent.

Fellow CwA member Rwanda is also making progress. According to the Rwanda Development Board (RDB), German business interests in the central African country have been slowly increasing in recent years, representing sectors including energy, manufacturing and construction. But although businesses such as Volkswagen and Siemens have boosted Rwanda’s fortunes by more than $250m, it’s a long way from being the whole story.

Rwanda has always had a reputation for being one of the easiest places for business in Africa – a trend that’s supported by its rosy economic outlook. In fact, the International Monetary Fund (IMF) is projecting growth of 8.5 percent, revised up from its previous 7.8 percent forecast as a result of a higher-than-predicted GDP performance during the first half of the year. With growth expected to remain punchy for the next few years, investors are keen to take advantage of the commercial opportunities, especially given Rwanda’s commitment to a strategy aimed at increasing transparency and improving governance.

Too cautious?

That German small- and medium-sized firms would shun these opportunities, then, is rather surprising – especially since these markets remain still largely untapped. A continent of plentiful natural resources, Africa’s oil, gas and mineral wealth has driven raid economic growth in many African countries. However, with its output becoming increasingly diverse, spanning sectors such as agri-business, manufacturing and service-led industries, the potential for growth is vast.

A 2019 report by McKinsey estimates that by the middle of the twenty-first century 80 percent of Africa’s population growth will be in newly urbanised regions. With an improved investment ecosystem, better governance and a rapidly expanding and youthful population, the opportunities for transformative growth seem endless.

The reluctance of German businesses to explore African investments could result in many missed chances. The CwA initiative is a sound one, based on generating much-needed capital, rather than endless aid programmes that have served to stunt rather than boost economic growth on the continent. However, German businesses need to be willing to make the jump before it’s too late.

Image credit: GovernmentZA/Flickr

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