A Catalyst for Transformation: Exploring Germany and Africa's Joint Venture for Private Sector Development

 

A vibrant and dynamic private sector is crucial to economic transformation in Africa. Nurturing a competitive private sector including a good mix of foreign direct investment and local entrepreneurship is fundamental to fostering innovation, stimulating growth, and creating jobs.

Across the continent, the challenges of private enterprises are many and well known –from weak and inconsistent policy and regulatory regimes to poor infrastructure and fragmented markets often operating in the informal sectors of the economy and political economy issues that directly and indirectly impact the private sector. For domestic entrepreneurs/firms, an underdeveloped and sometimes unorganized small- and medium-sized enterprise (SME) ecosystem marked among others by insufficient sources of the needed finance, especially in patient capital, limits investment. This constrains growth and integration into global value chains.

Addressing these challenges would be key to unlocking economic dynamism and stimulating inclusive and resilient economic development on the continent. Recognizing this, Germany has been at the forefront of supporting private sector development in Africa through various initiatives including BMZ/GIZ programmes on entrepreneurship and active support for EU programmes such as the Global Gateway. Germany's backing of the G20 Compact with Africa (CwA) since 2017 underscores commitment to fostering economic cooperation towards reforming  macroeconomic, business and financial environment for investment.

Proposed reforms highlighted in the German Federal Ministry for Economic Cooperation and Development (BMZ)’s Africa Strategy emphasizes future cooperation with Africa, particularly in the areas of trade, private sector investment and innovation. Recognizing the significant challenges arising from a rapidly growing population, the strategy also prioritized employment and enhanced economic participation.

In sum, Germany’s support for private sector development is fitting but more can be done. In this blog post I explore three critical areas where Germany’s investment and strategy in Africa could help fortify the fundamental pillars of SME growth in Africa's economic transformation journey. I argue that, Germany is well-positioned to play a strategic role in supporting private sector development in Africa, by leveraging its strong industrial base, technological expertise, and commitment to sustainable development in three areas: (a) supporting ongoing efforts on green industrialization and just energy transition on the continent; (b) facilitating skills development and knowledge transfers between Germany and strategic sectors on the continent; and (c) facilitating trade and Africa’s regional integration and collaboration.

Supporting Green Industrialization and a Just Energy Transition

The average cost of reducing emissions in developing economies, including Africa, is estimated by the International Energy Agency (IEA) to be about half that of advanced economies. This emphasizes that while all nations must strive to decrease emissions, investing in clean energy in Africa stands out as an especially cost-effective approach to combatting climate change. Supporting African countries in tackling climate change, prioritizing the implementation of the Nairobi Declaration adopted by the recently held African Climate Summit  will be a good starting point. Beyond that, given that Germany is far ahead in green energy development and transitioning, the country should be a strong proponent of supporting African governments in aligning their industrial policies towards climate-positive green investments, particularly in the field of new adaptation and mitigation technologies. Large-scale impact on the continent will require reinforcing regional power pools –whose establishment has been significantly constrained by funding –for greater regional integration. Germany, renowned for its leadership in industrial development and renewable energy, should leverage its expertise to advocate for and support African governments in transitioning toward climate-positive green industrialization. This includes creating incentives for German companies to invest in solar, wind, and geothermal energy projects across Africa, providing both financial and technical assistance, development of new technologies and applications and local processing of merchandize exports. Germany, as a leading manufacturing nation, can play a strategic role in assisting Africa's manufacturing sector particularly labour-intensive agricultural processing, precision technology, and job creation for the growing population of unemployed youth on the continent. Facilitating meaningful partnerships between German firms and local firms to develop sustainable infrastructure, such as green buildings, energy-efficient transportation systems, and sustainable waste management solutions will go a long way to catalyse the green industrialization process of the continent. In all this, it is imperative to recognize the significance of local perspectives and ownership. This will help Germany forge lasting partnerships with African governments and local communities in a bid to understand their needs, and co-create solutions that align with each country's unique challenges while fostering shared ownership and collaborative frameworks.

Enabling Skills Development and Technological Upgrading

In a rapidly evolving digital landscape, Germany can facilitate capacity building and technological advancement in Africa. By supporting reforms in Technical and Vocational Education and Training (TVET) programmes, Germany can provide tailored technical assistance to African countries in modernizing their TVET programmes, aligning them with current industry and global demands and emerging technologies under the third and fourth industrial revolutions. Collaborations between German technical institutions and African technical and vocational institutions to facilitate knowledge exchange, curriculum development, and student exchange programs will be a major conduit to facilitate the process. Simultaneously, through partnerships with the private sector, particularly in technology upgrading for Small and Medium-sized Enterprises (SMEs), Germany can foster knowledge transfers and boost linkages with the local economy and increasing production, thus reducing import dependence, and enhancing competitiveness. In the face of massive youth bulge, rapid digital transformation, and the massive drive for entrepreneurship and job creation in many African economies, the continent's demand for knowledge transfer remains high. Germany could leverage this wave by providing targeted training programmes for workers and entrepreneurs in SMEs in key priority sectors. However, to avoid the pitfalls of similar past projects, it will be crucial to draw lessons from those projects and to understand the political economy issues such as the intricate and dynamic governance challenges, elite capture and equity and inclusiveness challenges. For example, selection of beneficiaries, geographical location of projects, as well as societal and cultural factors could hinder the effective implementation of training programs in SMEs.

Facilitating Trade and Africa's Regional Integration

To maximize Africa’s economic potential, Germany should champion the harmonization of EU trade policies for Africa with the African Continental Free Trade Area (AfCFTA)’s rules of origin, tariff reduction schedules, and non-tariff barriers reduction commitments. These new trade policies should be equitable and considerate of the growing needs of industries in both Germany and the continent. Instead of dealing with African countries bilaterally, drawing inspiration from the EU's model, Germany should adopt a regional approach to trade on the continent by supporting the delivery of regional public goods to foster intra-African trade and access to crucial elements within of regional value chains within African regional blocs. This shift would strengthen the Africa-German partnership, enhance SME competitiveness, and ultimately contribute to job creation, skill enhancement, and the reduction of transcontinental migration of unskilled labour. Additionally, leveraging Germany's trade experience to support Africa in negotiating treaties and expanding markets can remove trade barriers that make it difficult for African companies to export their goods and services to Germany and other European countries. Finally, the continent needs a lot of support in leveraging fast growing services trade for Africa’s economic transformation, which offers possibilities to expand the continent’s digital economy and to exploit Africa’s comparative advantage in renewable energy.

Conclusion

The symbiotic relationship between Germany and Africa's economic evolution hinges on not only successful traditional government-to-government partnerships but robust and meaningful private sector collaborations. Germany's proactive initiatives and support have laid a solid foundation, yet there is immense scope for deeper engagement beyond what currently pertains. By championing green industrialization, nurturing skills development, and aligning trade policies with the AfCFTA protocols, Germany can boost a mutually beneficial partnership with the continent, fostering prosperity and sustainable growth. But in doing so, it is important to be conscious of and be ready to navigate the intricate governance challenges and the social-cultural contexts as described earlier. All these significantly influence economic collaborations and must be navigated adeptly to realize the full potential of this partnership for both Germany and Africa.

Dr Edward K. Brown is a Senior Director, Research & Policy Engagements at the African Center for Economic Transformation (ACET). He has more than 35 years of experience in international development and public policy, half of which were spent at the World Bank.

Responsibility for the content, opinions expressed and sources used in the articles and interviews lies with the respective authors.