After a few years in which even such down-and-out economies as Mozambique rallied, Africa is again too risky for emerging market investors.
Two weeks ago I wrote that now is one of those times for investors to get their feet wet in emerging markets. The overall global economy is stronger than it has been in a decade, commodity prices are rising and price-to-earnings ratios abroad are favourable (particularly compared with Nasdaq). As examples of key emerging markets, I cited South Korea, Hong Kong and China.
Some readers have asked whether Africa makes the list. All the headline news is bad, but South Africa, the only market of size in the region, could be worth a bet given its minerals and its heroic attempts to achieve multi-racial stability.
Regrettably, the answer is no. After a few years in which even such down-and-out economies as Mozambique rallied, Africa is again too risky for emerging market investors.
The problem is not Sierra Leone, which was never a magnet for investors: The problem is the fallout from the Congo chaos, which metastasized to Rwanda, Uganda and particularly Zimbabwe. It is now having serious effects on South Africa. Unless the Zimbabwe situation can be resolved peacefully, capital will continue to flee South Africa.
The culprit, of course, is Robert Mugabe. He is the kind of African socialist beloved of Western liberals, which means he routinely attracted cash from do-gooders, governments and international agencies. This worked for a while. Then Laurent Kabila started the Congo war. Support for Kabila came from the usual suspects in the international aid business, because he was engaged in a secular holy war to dislodge the despised Mobutu Sese Seko. Mobutu was not beloved of Western liberals because he was corrupt and anti-communist when such things mattered greatly. (By way of contrast, Fidel Castro remains beloved of Western liberals though he is corrupt, because he was communist when such things mattered greatly and remains a communist even when they matter less.)
When Congo reverted to the jungle, its immense mineral resources were suddenly at risk. This was bad news for Robert Mugabe, who proceeded to send in his army. Why? I understand it is because Mugabe had not made a pre-nuptial agreement.
When Mugabe came to power in Zimbabwe, he piously announced that, as a socialist, he would hold no wealth in his own name. Instead, he shovelled the loot into his wife’s name. The fortunate Mrs. Mugabe was a Ghanaian, who, it turned out, was a strong family person. When she died, she left everything to her family up north, forcing the moralistic Mugabe to marry anew, and to resort to more drastic measures. He invested some of the proceeds of his office in Congo mines. (One source of those proceeds was the state lottery, which he won, proving that the gods smiled on such a great leader of his people.)
The Congo war forced Mugabe to send in his own troops to protect his investments. Who says African socialism isn’t on a higher moral plane than colonialism?
Sending in those troops was a costly burden for Zimbabweans. They had the lese-majeste to reject Mugabe’s constitutional demands in a referendum. He responded by playing the race card, sending thugs on to white farmers’ land to loot and kill.
This has proved too much even for Western liberals. Aid agencies have cut back their largesse, and the International Monetary Fund is withholding further credits. The Zimbabwean economy is collapsing.
Tragically, the contagion has spread to neighbouring South Africa. The rand is falling, as international investors fret that the South African government resists condemning Mugabism. With heavy unemployment in South Africa and radical resentment against the moderation of its regime, Mugabe is seen by many as a hero. That is the kind of demagogy that South Africa’s delicate experiment in multi-racialism can least afford.
In the first years after the Brits left Africa, per capita GDP there was higher than in East Asia. Since then, East Asia has progressed mightily by embracing capitalism, and Africa outside South Africa has regressed mightily by embracing socialism and tribalism.
The risk now is that South Africa will be forced to pay a penalty for others’ sins. That may be one risk too many.
Emerging market investors should stick to Asia, Eastern Europe and Latin America.
Donald Coxe is the chairman of Harris Investment Management of Chicago and Jones Heward Investments; firstname.lastname@example.org
Donald Coxe, The National Post, May 20, 2000