- Jul 01 2017
Compact with Africa aims to remove obstacles for private investment. At the core of the initiative are country-specific investment compacts.
Africa is high on the agenda at this year's G20 summit of the world's major economies taking place in Hamburg on 7-8 July. The German G20 presidency has made an intensified partnership with Africa a top priority. The Compact with Africa, a plan to boost private investment, especially for infrastructure, is the main pillar of this partnership. Proponents laud the Compact as new approach to cooperation that can provide a push for development in Africa. Sceptics, in contrast, point to shortcomings in the initiative's design. The G20's partnership with Africa also raises the question of India's involvement, and how the Compact relates to another initiative launched by India and Japan, the Asia Africa Growth Corridor.
African countries face the challenge of transforming their economies after a long period of growth driven by high commodity prices. Several countries with more diversified economies, such as Ethiopia, Kenya and Côte d'Ivoire, continue to experience high growth. However, much more needs to be done to promote industries and services that can absorb a rapidly growing labour force. Between 2015 and 2030, 29 million Africans will join the labour market each year; only a quarter of them can expect to find a regular job. Concerns that a lack of opportunities might translate into instability and large migration flows to Europe have strongly influenced the German presidency's focus on Africa.
Private investment can be a driver of economic change. Foreign direct investment to Africa used to be concentrated in resource-rich countries. More recently, it has started to diversify and contribute to job-creating industries in countries such as Ethiopia and Kenya. In a context of rapid urbanisation and growing middle class populations, African economies have great potential to become production sites and consumer markets. However, Africa still attracts only a small fraction of international private investment.
Africa's massive infrastructure gap is one of the main obstacles. The continent has the lowest road and railway density; over 60 percent of people in sub-Saharan Africa do not have access to electricity. The Compact assumes a funding gap of around $50 billion per year. African governments have increased public investment but face worsening fiscal conditions. Over half the funding for infrastructure comes from external public sources, mainly multilateral development banks and China. Less than one in ten dollars committed to infrastructure comes from the private sector.
The Compact aims to remove obstacles for private investment. At the core of the initiative are country-specific investment compacts. African countries commit to reforms; in return, G20 countries and international partners improve framework conditions, provide technical assistance and raise awareness in the business community. The Compact draws mostly on established ideas to strengthen macroeconomic stability, improve the business environment and broaden financing options in African countries. The initiative's innovative contribution rather lies in the way it bundles these measures and uses the G20's political clout to coordinate a diverse range of stakeholders.
In mid-June, the G20 Africa Partnership Conference in Berlin initiated the Compact's implementation phase. Seven countries — Côte d'Ivoire, Ghana, Ethiopia, Morocco, Rwanda, Senegal and Tunisia — participate. Doubts remain as to how effectively the Compact can reach more of the poorest and most fragile countries, which have the greatest infrastructure funding gap. Private investment tends to shy away from difficult contexts. Evidence suggests that plans to de-risk private investment through mechanisms such as blending might not substantially alter this fact. The Compact's reach might therefore be limited to a few African "reform champions".
Investing in infrastructure and more diversified economies is a long-term effort. Ownership by African governments and continued engagement by G20 countries, including India, will be essential. India's development, trade and investment relations with African countries are rapidly expanding. India could also help strengthening complementarities between the Compact and the Asia Africa Growth Corridor.
First, India can bring a broader perspective to the Compact. India's longstanding expertise in capacity and skills programmes provides a necessary addition to the Compact. Addressing Africa's jobs challenge is as much about investing in people as it is about infrastructure. The Asia Africa Growth Corridor applies a more comprehensive view on investment and infrastructure, including aspects such as skills, health, quality of investments and entrepreneurship.
Second, India faces similar challenges in job creation and infrastructure development. The sharing of practical development experiences, emphasised in the Asia Africa Growth Corridor, would add value to the Compact's more technocratic approach. India has been one of the most active countries in attracting private investment for infrastructure, despite sharp drops more recently. India's successes and failures could hold useful insights for African countries in areas such as public-private partnerships and the issuance of local currency bonds ("masala bonds").
Finally, India can be a credible advocate for African representation in the G20. South Africa is a member of the G20 and the African Union will participate as an observer in Hamburg. However, a permanent, collective representation could strengthen African ownership, allow African countries to hold the G20 to account on international issues such as trade and facilitate cross-border projects.
Strengthening these and other complementarities between the Compact and the Asia Africa Growth Corridor can improve the G20's partnership with Africa. Advancing India's and the G20's relationship with Africa will be a long-term process, with India's possible G20 presidency in 2019 and the next India-Africa Forum Summit in 2020 as milestones.
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This commentary originally appeared in NDTV.