The Crucial Lessons African economies can learn from Germany’s Best Kept Secret

Theories on African development have been in a state of fermentation since the first wave of democracy swept the continent. Though it is the most resource rich continent in the world, Africa continues to be marginalized in the global economy and lags behind other third world regions such as Asia and Latin America in development. Much of Africa’s failure in development is due to the copying and pasting of Western models of economic development. It can be said without a doubt that Rostow models of economic development cannot simply be implemented on the continent given its unique history of capital accumulation by the West at the continent’s expense as well as colonialism, which was ultimately legitimized Western exploitation.

There are some vital lessons Africa can take from the West on development. For example, SMEs (mostly found in the informal sector) make up for approximately two-thirds of employment in African economies, and have often been presented as a possible salve for inequality, poverty and high rates of youth unemployment ravaging the continent.  Most African economies have been slow to introduce policies which offer sufficient support to SMEs, the effects of which have been a very competitive and precarious informal sector which is not contributing to development nearly as much as it could be. This is because traditional economic thinking tends to believe in economies of scale (that bigger firms with bigger networks of distribution are more efficient). However, many economies in the Western world are increasingly starting to believe in another production method: economies of small. Production in small scales and marketing for smaller networks with small customer-driven cycles has proven to be an innovative and robust way for several firms to operate profitably. African economies could harness the power of our vast, already existent informal sector by implementing policies which make it easier to formally register businesses, obtain capital and permanent sites for operation, as well as an investment in human resources which would encourage heterogeneity of the SME sector and technological innovation.

Few arguments for an SME driven economy could beat that of Germany. The world’s third largest economy has a unique and revered SME sector, collectively known as the Mittelstand. This group of firms has become one of the world’s most important sources for innovation and in Germany it employs 70% of the labour force. The Mittlestand is often named Germany’s best kept secret, because the millions of firms which belong to it are largely unknown to anyone other than their customers while simultaneously performing exceedingly well in international markets.  The reason for its success? The German government has institutionalized assistance for small firms, and SME policies form a part of the country’s regional policies. Germany also has a highly stylized education system which focuses on strong technical training. Its apprentice system requires 50 to 66 percent of education to be obtained through real work experience in a company and the remainder through formal education. This dual labour system covers over 300 trades, from bricklaying to hairdressing, and 83 percent of these apprentices are trained in Mittelstand firms. Furthermore, Mittelstand firms do not use price competition to edge out other firms in similar industries. Instead, they focus on high quality products developed innovatively and on being nimble in their production. Their capability to operate and employ people in small towns rather than industrial megacities has made rural to urban migration in Germany nonexistent, unlike in African countries. On a cultural level, the family values that form a core function of the Mittelstand have created a motivated, committed and highly remunerated human resource base. Most mittelstand companies are family founded and owned and believe in maintaining a familial kind of harmony with their employees. Herrenknetch, the leading manufacturer in the market for drills used to construct tunnels in mountains is a family business started in 1977 and still operated by the Herrenknecht family. It is a combination of these factors, as well as the niche markets they focus on (and dominate) that makes them the envy of all the global market.

That African countries need to move away from their heavy reliance on primary commodities is a truism, but  current fantasies about a drive to industrialization which will create giant conglomerates that spur economic growth and development are far-fetched, unnecessary, or both. A focus on aggressive and technologically relevant education systems which create a highly trained and innovative labour force, in addition to nurturing and legitimizing existing SMEs and helping them carve out a niche in a rapidly expanding global market could be the continent’s best hope yet.