Aid and Investment

The Answer to Africa

  • Why it matters

    Why it matters

    Development in Africa will not only help on that continent, but in Europe too. It presents a major potential market and business opportunities, right on Europe’s doorstep. The answer is a mix of aid and investment. But the problem is how to encourage German companies to focus on the continent.

  • Facts

    Facts

    • The International Monetary Fund estimates that Africa’s economy will grow by under 3 percent this year. That will be all but negated by population growth of 2.6 percent.
    • While the percentage of Africans living below the poverty line fell from 54 percent to 41 percent, the number living below the poverty line actually rose, since 1990.
    • German politicians from various federal ministries say African investment and development aid is becoming a major focus for the government.
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    Audio

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Flüchtlinge auf dem Mittelmeer
No future at home: Refugees fleeing Africa in the process of being rescued off the coast of Libya. Source: DPA

Back when most businessmen wouldn’t even give Africa the time of day, Mo Ibrahim was busy single-handedly bringing the African continent into the mobile age.

The son of a Nubian cotton merchant, Mr. Ibrahim bought mobile phone frequencies in Africa for only several million dollars when most players in Europe were paying billions. When he sold his cell phone company Celtel to Kuwait’s MTC in 2005, he walked away with $3.4 billion (€3.2 billion).

Mr. Ibrahim, 70, now lives in London and Monaco, but his home will always be in Africa. He has funneled most of his fortune into a foundation that awards a Nobel Prize of sorts to African leaders who have visibly advanced their country, governed according to democratic principles and stepped down peacefully once their term is up.

Recipients of the prize who meet all these criteria are awarded $500,000 a year for a decade and $200,000 a year after that. It’s a kind of pension for honest African politicians.

There’s only one problem: Africa, with its 54 countries, doesn’t have many rulers who fit the bill. The annual prize has only been awarded four times in the last 10 years.

That lamentable fact is an indication of the state of democracy in Africa, where heads of state are often more committed to padding their own pockets than caring for the common good.

07 p46 Africa in Numbers 4-01
Africa Peace Index Freedom

Over the past decade, hopes that Africa’s situation and its standing in the world were finally changing for the better have not come to fruition. As civil wars and Islamic terrorism spread, the International Monetary Fund (IMF) said it expected the overall African economy to grow by a meager 3 percent – which will basically be negated by the continent’s population growth of 2.6 percent.

If one calculates again, using a per capita basis and using the median for the whole continent, then the Africa economy as a whole, is stagnant. While the percentage of Africans living below the poverty line fell from 54 percent to 41 percent, the number living below the poverty line actually rose, since 1990 – a sad fact that’s entirely attributable to rapid population growth.

Millions of young Africans are eager to find a new life and new opportunities that their homeland doesn’t offer them, and many want to come to Europe to achieve that. Which is why the issue of African development has been pushed to the top of the political agenda in a number of European countries, including Germany as politicians fear ongoing waves of migration.

After years of political disinterest, the government in Berlin is now asking itself: Do we have a plan for Africa? It’s a vital question, both for Africa and Europe.

07 p46 Africa and the Rest of the World in Numbers 1-01
Africa GDP

In order for Africa to sustain itself, the continent’s economy needs to grow as much as China’s did, with double digit figures over two decades. At one stage, this seemed like it might happen. Between 2000 and 2010, six of the ten countries with the fastest growing economies in the world were on the African continent. Local and international analysts alike enthused about an increase in peace and democracy and economic growth and cheered the idea of “the next China.”

However the end of a boom period for raw materials also saw the end of Africa’s mini boom. “The decrease in oil prices tore giant holes in budgets in countries like Nigeria and Angola,” said former German president Horst Köhler, who developed a great fondness for Africa while he was in charge of the IMF. The African countries that depended heavily on the desire for raw materials, and which did not diversify, are now having to deal with sinking demand and much lower prices.

“Especially for Europe, Africa poses great risks if things go wrong. By the same token, if things go right, it also poses great opportunities,” Mr. Köhler said.

By 2050, the African population is expected to exceed 2.4 billion people. By then, Africa will account for 25 percent of the global population, while Europe will account for only 5 percent.

If the legions of young Africans don’t find that chance at life they’re looking for at home, the consequences could be dire.

“It’s easy to be alarmist,” Mr. Köhler argued. But it won’t be about “being overrun by hordes [of refugees]. Rather it will be about individuals searching for a new perspective.” On the other hand, Mr. Köhler adds, “terrorist groups like Boko Haram in Nigeria and al-Shabaab in Somalia have shown that it’s not difficult to convince frustrated youths to commit acts of ideologically- or religiously-motivated violence.”

Africa must not just be seen as a threat to be contained. If the continent can be guided along a path to sustainable growth, it has the potential to solve one of Europe’s own problems as well: sluggish growth.

With a prosperous Africa, Europe would get what it so desperately needs: a new, powerful sales market right on its doorstep.

Young Entrepreneurs At i-Hub The African Tech Hub
Encouraging investment: At the i-Hub technology innovation center in Nairobi, Kenya. Source: Waldo Swiegers/Bloomberg via Getty Images

“Africa needs more of everything,” Mr. Köhler said. “Schools and roads and hospitals and airports and power plants and production facilities and services.”

The fate of Africa is, first and foremost, a matter for Africans. But Europe’s own interests must also be considered. If Africa continues to stagnate, Europe will have more refugees, more terrorism and more suffering on both sides of the Mediterranean. On the other hand, if Africa achieves sustainable success, Europe’s needs in terms of growth would be covered for decades. Both continents urgently need a common strategy on how to proceed.

Moving Africa towards growth is something that German Economy Minister Brigitte Zypries also wants. But the reality is harsh, as Ms. Zypries found at a Germany Trade and Invest conference in a Nairobi hotel in February. One of the speakers at the event talked a lot about the insecurity and disadvantages that came with investing in Africa. Ms. Zypries was not impressed, word came from her inner circle.

“We must support Africa to become stronger in economic terms, for a number of reasons,” Ms. Zypries told Handelsblatt. “Africa needs investors – and it can be a very good investment for German businesses.”

Other departments in the German government are also on board. The ministry of finance wants to strengthen private investment in Africa with its Compact with Africa program and Germany’s chancellor, Angela Merkel, apparently also wants to use the country’s presidency of the G20 to foster more support for Africa.

Germany is also prioritizing Africa in terms of development aid. “The future of the African continent has never been so high on the global – as well as Germany’s – political agenda,” German development minister Gerd Müller has said.

07 p46 Africa in Numbers 2-01
Africa Direct Investments

The fact that Africa is a high priority would be a reason to celebrate, were it not for the decades-long failure of Western development aid to lift the continent out of poverty. Countless concepts have been tried and ultimately abandoned. Africa is a veritable graveyard for concepts about economic aid devised by the West.

In the 1950s, Robert Solow created a model for growth, based on finding the right balance between capital and labor. Africa has no shortage of labor, so according to that theory, the only thing it needed was capital in the form of machinery, factories, roads and dams. The World Bank and industrialized countries provided generous loans for Africa’s material wants. The debts piled up –  yet growth remained elusive. Once the new machines stopped working, they stayed that way, because no one knew how to repair them.

The next thing economists tried was providing Africa with the necessary know-how. Rather than constructing more factories, new schools were built. For a while, it actually had a positive effect. In 1970, around 70 percent of Africans were illiterate, compared to 36 percent today. Such educational gains are undeniably valuable, yet they never translated into any noticeable per capita growth.

After this development aid took the form of helping the Africans help themselves. Rather than hanging around in air-conditioned government buildings in African capital cities, aid workers headed out into the countryside and taught the locals how to drill wells and water their fields.

All the same, the long sought after growth never came. Instead, the poverty rate in Africa went from 10 percent to 50 percent between 1970 and 1990, two decades during which the continent was flush with development aid.

07 p46 Africa in Numbers 3-01
Africa Population

There have been many more attempts to kick start growth on the African continent. One included forgiving African countries their debt, another involved abolishing EU import tariffs for the poorest African countries. None of the attempts were necessarily misguided. But nor were they particularly helpful.

Today, the most popular development model looks to Africa’s public institutions. Its focus is on civil servants who are not corrupt, governments committed to the common good, fair courts and tax systems, and market regulations that encourage business and private investment.

This is also the approach that Mr. Müller, the German development minister, is taking with his ten-point plan for boosting growth in Africa.

In the future, Mr. Müller intends to attach conditions to development aid from Germany. Only if an African country makes a concrete commitment to, for example, the fight against corruption, the construction of a functioning tax system or the pursuit of more equality, will it be given more money. Twenty percent of the budget for bilateral projects with African nations – some €300 million – will be allocated to such “champions of reform.”

The second pillar of his plan is to strengthen private investments: “We will not be able to master the huge challenges on the African continent with public funds alone. We need a whole new dimension of cooperation, especially with regard to private investment,” Mr. Müller said. “That’s why we are making concrete suggestions on how to initiate more investment and reduce risks.”

Gold Fields Ltd.’s South Deep Gold Mine
Raw materials: Miners at the South Deep gold mine in South Africa. Source: Waldo Swiegers/Bloomberg

That is where Ms. Zypries’ department comes in again. There is talk of broadening the federal insurance on export credits as well as improving tax conditions for businesses who invest in Africa.

It is difficult for Germany’s small and medium sized businesses to invest in Africa. The risks are simply too great. This is where the German government comes in; there are a number of projects planned, including encouraging German businesses to mentor African ones and helping minimize the risks of investing in Africa.

Today, the generally accepted wisdom holds that both private investment and functional institutions are key to growth in Africa. But that key remains an elusive one. And consider this: In the past, development aid workers thought they had found it too – shortly before their projects failed miserably.

So what’s the right way to help Africa, and thereby Europe too?

There are a number of fairly radical theories floating around. The World Bank’s chief economist, Paul Romer, for instance, has put forward the idea of so-called “charter cities,” urban areas that would be constructed in Africa for millions of people, secured by private security forces and full of factories that would export to the world market free of tariffs. Mr. Romer sees this as a way of tempting more investors to Africa, investors who may have been put off by infrastructure issues, insecurity and corrupt governments in the past. The locals themselves could vote with their feet, moving to the cities operating under a different system, if they like the idea better.

07 p46 Contrasting Developments Africa-01
Africa GDP Map

Other development experts want to focus on empowering African women in order to break through the patriarchal system that prevails on much of the continent. Only strong, educated women, they argue, will be able to resist the pressure to stay perpetually pregnant. This would drastically reduce Africa’s skyrocketing birth rate and have an impact on economics in another way, allowing fewer Africans to share in more resources.

And then there’s the most controversial suggestion of all, the brainchild of a number of African intellectuals, including Kenyan economics expert James Shikwati and Zambian author and former banker, Dambisa Moyo, of all people. They have demanded that all development cooperation and aid with Africa be more or less suspended. Such financial assistance has created a culture in which people have grown used to handouts and lack incentives to are take control of their own lives.

The question remains: Which one of these approaches is the right one? The answer: None of them, and all of them.

Africa is made up of a wide variety of different countries, from the Arab-Islamic Maghreb to South Africa, the so-called rainbow nation, from Nigeria to the failed state of Somalia. Looking at Africa as a whole, and only as a whole, is like treating Europe like one homogenous bloc.

What is most likely is that the best solution is a smorgasbord of the various developmental approaches now available to different African states. Individual countries will have to decide for themselves whether they prefer to rely on funding from China, without strings attached, or money from Germany, with one serious string attached. They’ll have to choose whether to depose leaders who refuse to accept developmental aid, or whether they devote a part of their countries to some kind of neo-colonial regime of “charter cities.”

Only when Africa’s many states are permitted to go their separate ways, when they are viewed as individual countries rather than one, homogenous continent, will they enjoy the success that they – along with the rest of the world – desire and deserve. However as the European example – after hundreds of years of conflict and two world wars – shows, that could take a while.

 

Wolfgang Dreschler is Handelsblatt’s Africa correspondent, Dana Heide covers digital policy from Berlin, Corinna Nohn writes about consumer issues, business and family  and Christian Rickens covers business and economics. To contact the authors: dreschler@handelsblatt.com, heide.d@handelsblatt.com, rickens@handelsblatt.com and nohn@handelsblatt.com.