This week, over 40 African heads of states have made the trip to the European capital of Brussels—the city that embodies the dream of what regional integration could deliver to Africa—for the EU-Africa Summit. Germany and Angela Merkel will be part of the European heads of states attending the meeting. Unlike the African heads of states meeting in China where the main objective is to raise additional resources for much needed infrastructure; in Japan for help on institutional development; and in France to redefine and strengthen the historical ties that bind or build new ties—the relationship between Germany and Africa, an old relationship, is one that should take center stage. Germany has increasingly more to share with Africa.
Germany is the fastest growing country in Europe. It is projected by the International Monetary Fund to grow at 1.6 percent in 2014, compared to only 1 percent on average for the euro area. And while in 2012 and 2013 average EU area growth averaged -0.5 percent, Germany’s average growth was 0.7 percent. Germany, like Africa, has weathered the financial crisis well. Sub-Saharan Africa is the second fastest growth region after East Asia, with a growth rate of 4.8 percent in 2012 and 5.1 percent in 2013. Like Germany with the Marshall Plan, Africa has benefitted from substantial amounts of aid. Post-World War II Germany was the first global fragile state that succeeded in making an impressive turn. Germany has been at the center of two processes of integration: first, the EU, and then the merging of East Germany with West Germany. Throughout this period, Germany has led the way in the industrial revolution—as a leader in the manufacturing sector—and is one of the textbook examples of the power of cluster and value chain development.
There is much in its history, culture and economy that can be shared with Africa. From collaboration on issues of industrialization, regional integration and energy efficiency, this partnership will benefit from increased attention.
How Africa Can Build on German Markets for Industrialization
Industrialization is a priority for many African governments, and over the last decade its exponential population growth has accelerated the need for countries to put in place sustainable policies for job creation. Just last week, African finance ministers met in Abuja to discuss job creation and share experiences. In Europe, Germany has led the way forward in the industrial revolution: She is a leader in the manufacturing sector and is one of the textbook examples of the power of cluster and value chain development. Germany is currently the world’s second-largest exporter in value-added terms. For decades, Africans have trusted German industry and its products, such as household products like blenders to cars to computers.
In addition, trade between Africa and Germany has accelerated over the last decade. Imports from Germany to sub-Saharan Africa increased by over 133 percent between 2002 and 2012, going from $100 billion (2005 constant USD) to over $350 billion. Exports from the region to Germany have also risen by the similar magnitude. The top three export categories from Germany to Africa are machinery, manufactured goods and chemicals. Germany has, over time, increased its imports of fuel-based commodities from Africa, and imports of food and other commodities have decreased as a share of total imports: The top three imports from Africa are fuel, agriculture commodities and some manufacturing—but over 75 percent of all imports are fuel.
With German exports to other emerging markets dropping, Africa is becoming an important export market for Germany. As Africa’s middle class grows, the demand for manufactured goods from Europe and Germany in particular stands to increase. Germany can benefit from rising demand for its exports from Africa at a time when its exports to the rest of Europe are dropping. Increasing its exports not just to emerging markets but to all of Africa could help Germany accelerate its growth. Africa should use its growing market size and incomes to pull greater foreign direct investment from Germany and build supply chain linkages with German companies—a credible path to long lasting industrialization. Today, Germany is a major exporter of intermediate goods used in the manufacturing supply chain. Therefore, as German automotive factories and parts manufacturing seek cheaper labor out of Europe, Africa can position itself to compete for some parts of this industry. South Africa, Nigeria, Angola, Ghana and Kenya are the top five countries that account for over 80 percent of all German exports to Africa. These countries also have the skills mix to host German FDI locally. The increase of imports of passenger cars from Germany to Africa, for example, has increased from about $700 billion in 2002 (2005 constant USD) to $1.8 trillion billion in 2012. Over 80 percent of German imports from Africa come from South Africa (37.2 percent), Nigeria (35.8 percent), Côte d’Ivoire (7.8 percent) and Angola (2.1 percent). As noted above, Africa’s exports to Germany, however, are concentrated largely in the fuel sector—implying Africa is not competitive on other fronts. Thus, the ongoing EU-Africa summit should provide a launching pad for discussing the terms of a strong trade partnership with Germany as part of the overall EU-Africa trade discussions.
In addition, while FDI from Germany can help improve Africa’s competitiveness, a number of factors continue to stand in the way, including labor market reform—another policy area from which African can learn some lessons from Germany. Labor market reforms will be crucial for Africa to benefit from its demographic dividend, especially as the population in Germany ages.
Building Regional Markets—A Strategic Element of German Aid
Germany remains an important bilateral donor for sub-Saharan Africa. Germany is the fifth-largest overseas official development assistance (ODA) donor in terms of disbursements. In 2011, it gave as much ODA as the African Development Bank. However, as a share of total official development assistance from Germany, Africa only receives 35 percent, putting Germany well behind countries like Sweden, Luxembourg and the Netherlands from which over 50 percent of each country’s ODA goes to Africa. Germany lost its position as the third-largest bilateral donor to Africa in 2005 to the U.K.
A sizeable share of German ODA today is directed towards supporting regional integration and capacity building. Their experience with regional integration is invaluable to Africa. Over the last five years, as the effects of the worst financial crisis since the great depression raged on, the debate on the future of the eurozone and European economic integration took center stage. Germany’s consistent leadership helped steer the European Union away from the brink. Today, as Africa contemplates regional integration, first via sub-regional economic blocks and then as a continent, the experience of Germany is pertinent. Through its development cooperation arm GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit), Germany began providing support to the African Union and its affiliated institutions in 2003. The cooperation framework between Germany and the African Union seeks to build and strengthen the African Union and, as such, all agreements are anchored within the regional body. A flagship of the cooperation between Germany and the African Union is through Germany’s support of New Partnership for Africa’s Development (NEPAD), the Programme for Infrastructure Development in Africa (PIDA) and Institutional Architecture for Infrastructure Development for Africa (IAIDA). This cooperation agreement, which began in 2006, has helped the African Union identify and develop of a number of key regional infrastructure programs as well as forge consensus on a number of priority programs to be presented at the NEPAD-Dakar Financing conference in May of this year.
Learning from Germany—Diversifying the Energy Mix
African countries can benefit from Germany’s successes and learn from its challenges. A major increasing area of cooperation is in energy. The entire continent of Africa generated only 629 TWh of energy in 2010—roughly equal to the generation capacity of Germany. In this area as well, Africa and Germany can build a strong and lasting partnership, learning from each other. Germany, like Africa, has embarked on a bold and aggressive strategy to diversify its energy mix. Germany is diversifying from nuclear energy to more renewable alternatives of energy with a target of having 60 percent of final energy consumption from renewable resources by 2050. Many African countries are also aiming to diversify their energy mix for cost and environmental reasons. Currently, about 80 percent of all the energy produced on the continent today comes from heavy fuel oil (43 percent) or coal (37 percent) according to the BP Statistical Review of World Energy. Many countries in Africa aim to have over half their energy mix from gas, hydro or other renewable resources such as solar and wind.
First and foremost, as Germany has demonstrated that the need for a credible policy statement and objective for the sector is crucial. This should provide clear direction on the energy objectives, the mix and targets of the government with accompanying amounts for private and public investment. In the case of Germany, the Renewable Energy Resources Act of 2000 provided the anchor for all policy on energy and set out clear directions. This firm engagement from the German government, anchored in policy and with corresponding budget incentives, was able to galvanize the private sector to accelerate research and development in renewable energy, which has allowed Germany to triple renewable energy generation in a decade. However, Germany is still facing similar constraints like many African countries where the regulatory environment is weak and the development of credible production plans for generation, transmission and distribution infrastructure remains wanting. In many African countries, the lack of credible investment plans has dampened investor interest and delayed investments in the sector. In addition, the poor state of the energy companies has undermined development in the sector. In addition, another important drawback for energy sector development in many African countries is the lack of a credible market-based system for tendering. However, Nigeria has just successfully completed the most ambitious energy sector bidding process on the continent in the last decade. While the process is not complete, it has demonstrated its merits. Both Germany and many more African countries could benefit from this experience.
African’s competitiveness and inclusive growth strategy would benefit substantially from greater and more sustained engagement with Germany. The EU-Africa meetings should help to lay the groundwork for this strong and growing partnership. A good and solid economic relationship between Africa and Germany will help Africa better penetrate the EU markets. Germany should be Africa’s manufacturing gateway to Europe and its pathway to a sustainable productivity in enhancing the industrialization process.