We need to create trust to attract investors to Africa, says Germany’s Chief Economist

8th November 2017 Jack Aldane

In previous interviews you recall the years immediately after the financial crisis as some of the most difficult of your career at the ministry. Have recent crises beyond German borders modified this feeling in any way?

I would say that the global financial crisis was in a way a very extended crisis. It started with the US, but then it became a European crisis. For me, it was all one big crisis. In the last three years things have calmed down and I’m certainly happy that we are now in a broad-based global economic recovery. It makes our life a lot easier, and it also has made our G20 presidency a lot easier. However, it would be prudent not to assume that there isn’t going to be a new crisis. And it’s important to strengthen the resilience of our economies to be ready for any future problems. Apart from preserving macroeconomic stability, I think it is important to preserve a spirit of mutual global cooperation as we have over the past year in our G20 presidency with some success.

Last year Germany finally reached its official development assistance target of 0.7 percent of GDP in accordance with the G7. How did your role contribute to this achievement?

My personal role was very limited, but the role of our government was of course very important in reaching the 0.7 percent target for the first time. Germany is by now the second largest official development assistance donor in the world after the US and before the UK, even though the UK is also a great supporter of this goal. Germany’s ODA last year includes expenses for the crisis response in Syria and in-donor refugee costs, in line with OECD rules. In 2017, our ODA ratio is likely to decline a tiny bit, but if you round it up it is still likely to be around the same. Apart from this, we are also the fourth biggest contributor to the UN regular budget and to UN peace keeping budgets, so we are also financially very engaged in the international crisis prevention, action and humanitarian assistance through that channel.

You’re someone who has a firm understanding of the problems governments face in generating the necessary resources to fight poverty. With that in mind, what role do you think development finance institutions such as Germany’s DEG play in being able to lend technical assistance and, crucially, create new markets in high-risk regions?

I think institutions like DEG are playing a very important role. The challenges to fight poverty are tremendous and scarce public resources must be complemented by private sector resources. Public development cooperation focuses on improving public and social infrastructure in various areas and addressing governance issues for market-led development by providing technical assistance. This approach is conducive to deeper and broader private sector development in our partner countries because without appropriate framework conditions, investment is not taking place to the extent needed. You also need better financial services in terms of both quality and quantity for private sector companies. The risk profile of investment is often very high, which can be helped by better financial services.

DEG provides crucially needed finance, especially in extremely difficult economic frameworks in partner countries. DEG steps in where commercial banks are not active or are on their way out. It helps private companies to grow and so creates formal and sustainable employment. By financing the Berlin-based firm Mobisol, for example, more than 200,000 people can gain access to energy supply for the first time. Home solar panels have also been distributed with an affordable pricing structure for locals. The new initiative of the German Desk, jointly led by DEG and the German Industrial Chamber of Commerce, is another very good example. They are points of contact for private companies with partner banks of DEG in order to access finance.

Investment in the poorest countries is increasingly marketed to the voting public in developed Western nations as a duty not just to those in need but to one’s own society, particularly where it targets humanitarian crises at the source. What position does the German government take and how is the ministry looking to implement it?

Africa’s population is growing rapidly as you know, and economic development is having an increasing global impact alongside this. That is partly why we’re putting a lot more emphasis on Africa. We are promoting a coherent strategy on the continent and in June this year the Federal Cabinet published a whitepaper on economic development in Africa. This whitepaper focuses on how to have better coordination domestically and internationally, because fragmentation both within and across countries has been a problem. The strategy is more oriented towards the demand of countries and towards the private sector where improving the investment environment is essential. This is a holistic approach and is embedded in the German G20 strategy. In this regard the chancellor developed the G20 Africa Partnership and the Finance Track, for which I was the G20 deputy, launched the Compact with Africa initiative. That should help to minimise the root cause of displacement and illegal migration and promote opportunities in Africa, especially via an improved environment for private investment.

How is the ministry looking to support new and innovate financial instruments to open up ways for the public and private sector to transcend traditional aid and begin a new era in which private capital leads development?

The private sector has played a leading role in the development of Asia and I think it also needs to be at the forefront of development in Africa. For too long we have focussed on providing aid and not creating opportunity. We have focussed too much on government intervention. The Compact with Africa is therefore a demand-driven initiative, which is all about private investment. The key is to reduce the riskiness of investing in Africa, but not simply by passing risks on to somebody else. Political risk, regulatory risk, the weak administrative capacity, will all be reduced through the reforms undertaken by African countries. The G20 provides a political platform to advertise these changes and the member states have promised to encourage private investors to take advantage of these new opportunities, thereby creating success stories. In a way, what the compact is ultimately about is that commitments or promises are kept. This creates trust, and when trust emerges, that’s when investors come, and you get a virtuous circle.

Having fulfilled the role of chief economist for six years now, what do you feel you have left to achieve at the German Ministry of Finance?

The key now is to follow through with implementation and to ensure continuity throughout the next G20 presidencies. We know what needs to be done. We have created the proper get up in G20, and now we need to follow through with implementation. If you want to go further to what challenges are left for me, well, the chief economist is a very modest little person in the machinery of governments. However, we have to continue the stabilisation work in Europe. In Germany, we have many challenges left to improve the environment for the small to medium-sized enterprise sector. So as an advisor, I still have a lot of work left to do over the next several years, if I am given the chance.

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