German Chancellor Angela Merkel hosted African leaders on Tuesday, pledging a new development fund to tackle underdevelopment on the continent that has helped to spur mass migration, shaping the later years of her long premiership.

Merkel announced on Monday she would retire from politics by 2021, sending shockwaves across Europe and starting a race to succeed her.

She needs the Compact with Africa summit to show that progress has been made in addressing the aftermath of one of the defining moments of her 13 years in power: her 2015 decision to open Germany's doors to more than a million refugees.

The Berlin summit, attended by 12 leaders including South African President Cyril Ramaphosa, Ethiopia's Abiy Ahmed and Rwanda's Paul Kagame, is designed to showcase the continent as a stable destination for German investment.

The International Monetary Fund's Managing Director Christine Lagarde is also there, along with a host of international development officials.

The aim is to create good jobs for Africans, easing the poverty which along with political instability and violence has encouraged large numbers to head for Europe.

"We Europeans have a great interest in African states having a bright economic outlook," Merkel said in her opening speech, announcing a fund to help small and medium-sized enterprises from both Europe and Africa to invest on the continent.

Germany has already introduced tax incentives for its companies to set up plants in Africa, reflecting Merkel's view that state aid must give way to private investment if jobs are to be created in their millions.

If Merkel is to ensure the leadership of her Christian Democrat party passes to a centrist ally, such as current general secretary Annegret Kramp-Karrenbauer, she needs to show that she has made progress in fixing the conditions that led to her fateful decision three years ago.

Other candidates, including Health Minister Jens Spahn or her old rival, the strongly pro-business Friedrich Merz, are well to her right politically and could be expected to want to challenge much of her legacy.

Merkel presented her decision to open Germany's borders to refugees fleeing war and poverty in the Middle East as well as Africa as an unavoidable necessity driven by the vast scale of the human tide.

The crisis upturned European politics, revitalising the Alternative for Germany (AfD) party, whose demand that the country shut its borders to migrants helped to fuel its surge into parliament in last year's election.

But officials around the chancellor believe that migration can only be slowed sustainably by removing the "push" factors of unemployment and instability in Africa, something that will only be exacerbated by climate change.

A successful outcome to the summit may help to strengthen Merkel's case for remaining chancellor even after stepping down from the party leadership, and could quieten her coalition partners in Bavaria's conservative CSU and the Social Democrats (SPD).

All three parties have suffered punishing setbacks in regional elections this month, building internal party pressure for them to switch leaders or break up the coalition.