More Trade, Less Aid

 

Germany’s Federal Ministry of Economic Cooperation and Development - BMZ’s new Africa Strategy, unveiled in January 2023, acknowledges that creating an enabling environment for new jobs that have a social and environmental impact, and at the same time empowering is important. Reading through the BMZ’s six Africa Strategy focus areas, energy transition partnerships, sustainable infrastructure, establishing a new green hydrogen industry, processing food locally, more intra-African trade or better access to credit for women are highlighted. Digital technology is also mentioned as an important transformation lever, especially for the young generation.

On paper, this reads like Germany is beginning a policy discussion with Africa rather than about Africa, which has been done previously. This had begun under Chancellor Merkel, who visited Africa more than 25 times and hosted a summit for African heads of state and government in Berlin four times. A driver for this was managing migration and seeking to improve conditions in countries of origin. In 2017, Merkel used Germany’s G20 presidency to relaunch Germany’s Africa policy, partly through the Compact with Africa (CwA). Twelve African nations are part of the CwA, but what are the results is debated, despite upbeat official reports.

Migration, development, and security looked to be the prime focus of the coalition government's Africa policy back in 2021 and the German private sector was conspicuously absent. However, what are key German interests in Africa currently is ill-defined. Strategic and critical minerals, counterterrorism and managing migration still need spelling out more clearly as key German foreign policy objectives.

Sharpen Bilateral Policy

The African continent is 85 times the size of Germany but Africa’s diversity and how German policy navigates this needs sharper definition. It is fashionable to talk about multilateralism, but Berlin needs to define its bilateral relations with Africa’s states more clearly. With 43 diplomatic missions Africa is home to more than a quarter of Germany’s embassies worldwide. These embassies should become key building blocks, underpinning bilateral and sub-regional strategy. Their effectiveness should require better trade and investment promotion, and this will require more German diplomats trained for trade rather than aid and with more Africa expertise. This is something the UK is struggling with. Having left the EU and reduced its aid-budget, the UK is finding that many African governments increasingly want to focus on deepening bilateral commercial arrangements and access FDI from the City of London. Old style diplomacy is no longer fit for purpose.

Between 2016 and 2020, US$9.7 billion flowed from Germany to Africa in foreign direct investment. However, compared to other European nations, it still only spent half as much as France and three-fifths as much as the UK, according to an analysis by EY consulting. If you compare globally, only 1% of the investment of €163.7 billion ($173 billion) made by German companies in foreign countries in 2022 was in the African continent. In 2021, around 76% of the German capital went to European countries, while the Americas ranked second with 9%, and Asia took third place with 13%. Africa falls far behind and remains a low priority. More than half of Germany's direct investment flows to Africa go to South Africa, where more than 400 German companies employ some 65,000 people.

Educate and Mitigate Risk

This low level of German FDI into Africa is partly about perception. A survey conducted by the Federation of German Industry (BDI) of German companies and their Africa appetite highlighted corruption, political instability, bureaucratic hurdles, and the lack of skilled workers as the main problems they face in doing business on the continent. That the continent is risky and investment and trade unfriendly is often true, but not always and everywhere. It also begs the question if German companies are more risk-adverse than others, and to understand why this may be the case.

Africa’s potential and that there are bankable project and investment opportunities needs to be better promoted. Setting up effective measures to make investing in Africa more attractive and less risky for German firms, should be a priority such as expanding a fund for German investment in Africa and improved risk protection for German companies.

Germany’s Economy Minister Robert Habeck at an opening of a German African business conference in Johannesburg in December 2022 highlighted that, “There will be additional incentives to invest in regions like sub-Saharan Africa where we want more German investments and more German trade.” This is a welcome statement of intent but needs action.

Strategic Diversification

Berlin needs to find new markets to diversify trade and supply chains, particularly away from Russia and China. German companies want to boost their Africa trade especially in areas such as green hydrogen and liquefied natural gas, with 43% planning to increase investment in the continent, according to a survey by the German African Business Association. The Association, which claims it represents around 85% of German businesses active in Africa, wants the German government to also provide support through improved conditions for export credit insurance and investment guarantees.

Africa is also important for Germany’s energy transition and its metallic raw materials such as cobalt, lithium or the platinum group metals are important for the green transformation of industry. According to a study by the German Institute for Economic Research, Germany is 100% dependent on foreign suppliers for 21 out of 27 raw materials that are deemed critical. Sustainable extraction and further processing of the raw materials locally as well as security of supply of critical and strategic minerals for German companies is clearly important as Germany seeks to diversify its trade relations.

The African Free Continental Trade Area (AfCFTA) will also create a market with 1.3 billion people and a cumulative gross domestic product of US$3.4 trillion. Reducing intra-African economic barriers would make the continent more attractive for German investment and German development policy should make the implementation of the AfCFTA a priority, including by investing in intra-Africa trade and industrialisation

Germany also needs to make it easier for African countries to manage their debts including by providing budgetary support. Germany is a member of the G20, the Paris Club and the fourth-largest shareholder of the IMF. Germany with its European partners can also look at the question of how to better involve private lenders based in Europe in debt restructuring negotiations – for instance in the framework of IMF programmes.

African Migration

Like many countries in Europe, Germany is facing a shortage of skilled workers. The German government also in 2023 has given its final approval for a law that will make it easier for skilled workers from outside the EU to move to Germany. A new German Africa strategy should focus on supporting legal immigration options from African countries in the future while avoid predatory ‘cherry picking’ of talented Africans and weakening African states. Opening an honest debate on future German labour and the importance of a circular migration strategy with Africa is needed.

There is an opportunity for Berlin to re-engineer German-Africa strategy, drawing it away from overly humanitarian to putting a strategic, business focused spine through it. This will require Germany and African states and regions to define their interests such as what are their trade and investment needs. Otherwise, such a strategy could just result for some countries a sharper neo-colonial German mercantilist policy.

 

Dr Alex Vines OBE directs the Africa Programme at Chatham House and is an assistant professor at Coventry University and an honorary fellow of the Nigerian Institute of International Affairs, Lagos.

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