Investment Indicators from Peter George Issue No. 70 TURBULENT TREASURE CHEST GOLD, NUCLEAR and POLITICS Is South Africa a 'buy?' (Part III of a 3-Part Series) (Part I available at 321gold) (Part II available at 321energy) Peter George Jun 10, 2005 Scripture "See what the land is like and whether the people who live there are strong or weak, few or many. What kind of land do they live in? Is it good or bad? What kind of towns do they live in? Are they unwalled or fortified? How is the soil? Is it fertile or poor? We went into the land to which you sent us, And it does flow with milk and honey." -Numbers chapter 13, verses 18 to 21 SUMMARY We began the 'TURBULENT TREASURE CHEST' series two months ago. It now consists of three parts. The first focused on South African gold production, the second on the country's Pebble Bed Nuclear Reactor, the third on social change. Part 1 - No.68 - was published on April 5th. It traced the historical role of gold in the South African economy, from 1874 to the present. It gave medium-term upside targets for Gold and Commodities going forward. Extrapolation of the results served to support upside targets for selected South African gold shares. These make the index look 'bargain-basement'. On a broader scale, the report demonstrated the macro-economic effects and incorporated them into a short series of annual budgets for the overall economy, from 2005 until 2010. To describe the picture as 'encouraging' would be a gross understatement but it remains dependant on expectations of a continuing boom in gold, oil, and commodities. The purpose of producing an impact study was to assess future economic strength. This enables one to determine whether the country's financial foundations can potentially support the radical and wide-ranging changes necessary on the social and political front. Part 2 - No.69 - was published on April 29th. It highlighted expected developments in world energy markets, particularly as they affect demand for nuclear. Having established that the market was set to explode, the report focused on prospects for South Africa's remarkable 'Pebble Bed Nuclear Reactor'. It concluded that international demand could conceivably exceed the company's current budget by a factor of ten to fifteen times. The eventual impact on the overall economy will be very substantial. The effects begin to percolate from 2010 onwards and should continue until the advent of 'fusion energy' in 2027. The writer's purpose - as in Part 1 - was to demonstrate an evolving financial picture robust enough to support ongoing and widespread developmental change on a dramatic scale. The costs are likely to be heavy. However, given a vibrant and sustained democratic environment, the results will secure South Africa's long-term political future. The 'financials' which emerge from Parts 1 & 2 combined, are exciting in the extreme. They portray an economic picture amply strong enough to facilitate change. The conclusion is clear. The 'TURBULENT TREASURE CHEST' that is South Africa, could safely and substantially transform itself in the time required. This would be to the benefit of all its peoples. The country could dispel its critics and confound its 'nay-sayers'. What those changes are - and how they would come about - that is the focus of Part 3 below. Without a sensible and well-founded confidence in the long- term future of the country, foreign investors will justifiably shy away. Young whites will leave for 'safer climes' overseas. 1.0 ECONOMIC AND POLITICAL BACKGROUND The writer completed a BA degree in Politics, Philosophy and Economics at Oxford in 1962, specializing in 'Money and Banking' and the 'Economics of Colonies'. The last-named subject soon became 'politically incorrect' and the description morphed in quick succession. First, it became 'The Economics of Underdeveloped Countries', then 'The Economics of Developing Countries', finally 'The Economics of Emerging Nations'. Appropriately, one of the writer's lecturers at the time was a South African, Professor Herbert Frankel. He knew exactly what it was like to come from an 'ex-colony.' On the 'Money and Banking' front, the writer's Professor was Sir Roy Harrod. Among his works was a biography entitled of 'The Life of Keynes.' The economists were close friends. Despite that, Harrod pooh-poohed Keynes' description of gold as: "That barbarous relic". In sharp contrast to his famous colleague, Harrod maintained gold would always play a vital role in a stable monetary system. At the time, his beliefs were an aberration from the 'new norm' of FIAT money. In fact, the majority spurned them as a throwback to bygone days. The England of the late fifties and early sixties was a post-war environment in which 'state intervention' had become the fashion. One was therefore fortunate at the time, to sit at the feet of a man who understood the meaning of 'money' and was not prepared to bend with the wind. The writer's background in economics by no means makes him an 'expert' but, over the years, with the help of further reading, enabled him to differentiate between the major 'controversial streams' which embroil all students of the subject. They revolve around three basic tenets: 1. 'Classical Economics' - best espoused by Adam Smith and Jeremy Bentham in the late 1700's. Today's supporters believe in Free Markets and an individual's right to exercise choice in an atmosphere of minimum state intervention. 2. 'Socialism' and 'Communism' - Strongest supporters have included Britain's Labour Party in the aftermath of World War II, and the Soviet Union up until the collapse of Communism in 1991. 3. 'A varying mixture of both' - The Composition chosen depends on the political convictions and pressures affecting each governing party in turn - whether 'elected' or 'self-imposed'. In recent decades political parties ostensibly representing certain of the above economic theories, have occasionally run off in different directions from those they purported to support. Labour's Tony Blair morphed into a 'New-Conservative' as the role and power of unions shrank. Ex-President Clinton became a 'Quasi- Republican', briefly balancing his country's budget, on the back of a booming Dow. The most chameleon-like change of all came out of Africa. When the Republic of South Africa's last white President, FW de Klerk, peacefully transferred power through the elections of 1994, he handed control to a predominantly 'black' government. Having waited eighty long years to gain the right to vote, few expected the African National Congress (ANC) of Nelson Mandela to abandon its radical roots on verge of taking control, yet overnight that is what happened. Long after a ruthless party machine had batted its founding left wing 'Alliance' off to 'third man', overseas commentators still fail to grasp what has happened. Instead, they predict the worst - economic incompetence and a trail of unending deficits - yet to their surprise, they observe the opposite. Young whites who fled the country, prepared to suffer the slings and arrows of outrageous weather in the UK, or face the thankless task of forever counting sheep in New Zealand, increasingly rue the day they succumbed to unrealized fears. Many will in due course return. The Government's challenge is to welcome them, and hasten the process. 1.1 ANC'S 'DAMASCENE' CONVERSION FROM SOCIALISM It is interesting to trace the extraordinary conversion of the old-type 'African National Congress', once dominated by 'Stalinist-type Communists', to a party increasingly committed to free markets, centrist-based policies, and fiscal discipline. In an effort to address the problems of poverty, crime, unemployment, lack of housing, poor education and shortage of skills, there has to be a certain re-focusing in the future. A fresh measure of state intervention may be called for but always within the confines of what is 'globally acceptable' to the international investment community. Following their 'damascene conversion', the ANC was recently rewarded with a gushing complement by David Roberts, CEO of International Banking' at British-based Barclays Bank, as they prepared to return to South Africa after an absence of 19 years. Their R33billion bid for control of South Africa's biggest bank, ABSA, had finally passed all hurdles - both 'State' and shareholder. "We chose to invest in South Africa because it is an attractive market with excellent growth prospects, good macro-economic fundamentals, sound fiscal policies, a first-class regulatory framework and a stable political environment." The dollar equivalent of the bid was $5,5billion at time of conception. It was the biggest in the country's history and constituted 2,5% of last year's Gross Domestic Product of R1400billion. Colin Coleman, Managing Director of Goldman Sachs, South Africa commented as follows: "This may well open the floodgates of investment in South Africa. It would be our hope that other global multinationals view the country in the same light as Barclays - a high-growth emerging market opportunity." South Africa's current President, Thabo Mbeki, hailed the deal as: "...An inspiring and unequivocal vote of confidence in a democratic South Africa." In his weekly online letter 'ANC Today', Mbeki said: "The deal was made particularly significant by the fact that Barclays had chosen to disinvest from the country during the height of 'Apartheid'." He likened the effects to a further recent announcement that General Motors, which had also disinvested in the 1980's, now planned to assemble the new GM Hummer H3 vehicle at its plant in Port Elizabeth. "They have now returned in strength to make their contribution to the successful development of a new and free South Africa that BELONGS TO ALL THAT LIVE IN IT." 1.2 'TELL-ALL' BOOK BY WILLIAM GUMEDE What brought about this remarkable change of direction on the part of South Africa's ANC Government? The writer was fortunate to come across a review of a recently published book by black South African author, William Gumede. It explained and exposed some of the intricate machinations of a number of governing party's key 'movers and shakers.' Educated at the Universities of the Witwatersrand, Utrecht, Wolfson College Cambrige, and the London School of Economics, Gumede is currently a columnist for South Africa's Sunday Independent. He also does work for the Economist Intelligence Unit and the BBC World Service. He was previously Deputy Editor at the Financial Mail. Gumede conceived an idea to write a book in late 2000, but it has taken four years to produce. It is entitled: "THABO MBEKI AND THE BATTLE FOR THE SOUL OF THE ANC" The Deputy Editor of the Cape Times, Tyrone August, best summed up one particular aspect of the book's achievements: "The information Gumede provides on the ANC's metamorphosis - some of it revealed for the first time - is invaluable to a more complete understanding of key events in South Africa over the last decade." John Reed, Southern Africa correspondent of the Financial Times, went a little further: "Through meticulous reporting and artful synthesis, the author unravels the politics behind Mbeki's views on the economy, HIV/Aids, Zimbabwe, and Black Economic Empowerment." The writer believes he learnt something even more important. Mbeki and his supporters are clearly embarrassed and angry at Gumede's clever dissection of the President's manipulative skills. That aside, Gumede's book unintentionally had a profoundly positive effect as well. In important areas, it demonstrated a multi-faceted competence on the part of the President and key advisors.The revelation of Mbeki's economic mastery and successful redirection of the economy along essentially free market lines has been nothing short of miraculous. Yes, there are areas of weakness. The President's cold lack of compassion for the sick and dying on the AIDS front is one, and takes a lot of explaining. His failure to take a tougher stance with 'Mad Bob Mugabe' in Zimbabwe has disillusioned many whites, causing some to opt for emigration. Today Mugabe's victims are no longer just white farmers, viciously thrown off their lands. They now include 80% of a black population dying of Aids and on brink of starvation. We will return to these subjects in the body of our report. For the present, we give Mbeki credit where it's due. His ruthless pursuit of fiscal discipline has pulled the country back from the brink of the bankruptcy, which it approached at the time of the power transfer in 1994. In the process, and commodity markets permitting, Mbeki and his Minister of Finance, Trevor Manuel, have set South Africa on a long-term path of accelerating growth. 1.3 FINANCE MINISTER LAYS OUT THE RECORD In a statement in Parliament a week ago, Manuel laid out his record. "The macro-economic stability achieved since 1994 was necessary but not sufficient to ensure sustained growth in job creation and service delivery. This indicated the need for a discourse on how to think through fundamental problems such as the immense inequality in South Africa..The challenge was not to opt for pure market forces or attempt to be a developmental state, but to bring these two strands together. In the process the government would have to TILT ITS POLICIES in favour of the disadvantaged." Manuel summarized South Africa's latest economic achievements: 1. In 2004 the economy grew at 3,7% 2. In 2005 he expects it to grow by 4,3% 3. The Treasury is preparing to accelerate growth to 6% p.a. 4. In 2004 consumer inflation fell to 1,4%, thanks to a strong Rand. 5. Excluding Barclays, 2004 capital inflows totaled R60billion, or 4% of GDP. 6. At a miniscule 1,5% of GDP, the budget deficit has almost been eliminated. 7. Yet, prior to the changeover in 1994, the deficit hit a peak of 10,8% as white civil servants took retirement packages! By way of comparison - after adding back Social Security revenues - the current US budget deficit is running at close to 6% - four times higher than South Africa's. In his latest book, acclaimed US economist Dr Ravi Batra describes Greenspan's hijacking of Social Security revenues to cover a portion of the overall deficit as: "GREENSPAN'S FRAUD." 1.4 THE WAY AHEAD - 'DEVELOPMENT AS FREEDOM' In Manuel's statement above he advocated bringing together the two strands of: 'pure market forces and a developmental state.' To what does he refer? Herein may lie a guide to future policy. In a full-page report in South Africa's Sunday Times of May 12, journalist Brendan Boyle wrote an article headed: 'And now for real change...President Thabo Mbeki is indicating a determination to transform society at a fundamental level.' There was a particular quote, which greatly helped the writer understand - and eventually applaud - the nature of Mbeki's new economic thrust. He wrote as follows: "The National Treasury favours the broader definition of Nobel laureate economist Amartya Sen - in his book 'Development as Freedom' - which includes freedom from tyranny, economic exclusion and social deprivation as components of a developmental agenda." Boyle then proceeded to give his own interpretation as to what that agenda might entail. "While the ANC debates the exact nature of the developmental state, we have seen consistently since Mbeki's re-election last year that the state is being bolstered at the cost of 'Individualism.' To economists committed to 'free markets' and the protection of 'individual rights' his words sound threatening. However, having read Sen's book, the writer believes Boyle's comments miss the point of what Sen is trying to achieve. His radical development strategies are designed to promote maximum freedom. As a 'White man in his early sixties' the writer is excited and encouraged for what the future holds for his children in a South Africa determined to address the problems of all its people in a realistic way. Let us begin by listing Amartya Sen's educational and intellectual achievements as they appear on the flyleaf of his book. "Amartya Sen is the Master of Trinity College, Cambridge, and the winner of the 1998 Nobel Prize in Economic Science. He has been President of the Indian Economic Association, the American Economic Association, the International Economic Association and the Econometric Society. He has taught at Calcutta, Delhi, Oxford, Cambridge, the London School of Economics, and Harvard." If this is the man whose thoughts and theories are guiding South Africa's future policies, we ought to be both relieved and grateful - even if the result proves challenging. One of Sen's colleagues, Kenneth Arrow - a fellow Nobel Laureate in Economic Science - expressed his views on Sen as follows: 'Amartya Sen has made several key contributions to research on fundamental problems in welfare economics. By combining tools from economics and philosophy, he has restored an ETHICAL DIMENSION to the discussion of vital economic problems.' 1.5 REALITY DAWNS From the moment Mandela and Mbeki took over - as respectively President and deputy President of South Africa - following the elections in 1994, they both rapidly realized that the ANC's "FREEDOM CHARTER" call for widespread 'nationalization' would effectively sink any hope of securing much-needed foreign investment. With Mbeki taking the lead, the two of them set out to transform ANC policies - away from Socialism - towards conventional free market strategies. Ten years later Mbeki can congratulate himself that the programmed changes have been a great success. The latest Barclays deal says it all - so too does rising growth and increasing macro-economic stability. 1.6 SEARCH FOR A SOLUTION The challenge for the future is however of far greater magnitude. It is to eliminate an unemployment rate, which ranges from Mbeki's low rate guess of 26%, to more realistic estimates as high as 50%. Over the last decade, recovering growth has created over a million new jobs. Nonetheless, the ranks of the unemployed have swelled much more rapidly. Nowhere is mention made of the fact that the main cause could be an illegal inflow of immigrants. Some estimate over 8m people have fled from countries to the north. From Zimbabwe alone, South Africa has probably absorbed over 3m - 25% of the total population - as increasingly desperate Zimbabweans flee growing starvation and death. To compound the problem, young white South Africans - many of them highly skilled - have emigrated to what they think are friendlier climes. Most have gone to Britain, Australia, New Zealand, Canada and the US. In the decade since 1994, the white population has shrunk by 700,000. If one applies the same average growth factor enjoyed by other population groups, the white component ought instead to have GROWN by as much as 800,000. There is a potential 'shortfall' of up to 1,5m. They have either emigrated, or are 'temporarily' overseas with no immediate plans to return. The ANC government is already finding it difficult to fill skilled positions in health, education and housing, let alone attract the entrepreneurs and staff to establish competitive export industries capable of absorbing up to 10m unemployed, most of whom are uneducated, unskilled and often unhealthy. The greatest challenge in the decade ahead could therefore be to devise strategies to bring those young whites back. Far from 'chasing the white man into the sea' the ANC's very existence as a political party could depend on their ability to replicate their success in attracting foreign investment. Now they need to attract people. They unconsciously chased them away, causing them to fear for their future in the land of their birth. We will discuss some of the actions and policies responsible. We will suggest strategies to welcome them back. We will give reasons as to why we think the ANC could want to do it. Forgetting for a moment the emotional hurdles that have to be crossed, let's adopt a common sense stance. Why should the ANC appease foreign institutions? They need the investment. Why should they wish to persuade ex-South Africans to return home? Each trained person brings a blessing. Australia and New Zealand appreciate receiving hoards of skilled immigrants. It fuels their growth. The UK loves attracting doctors and nurses. Instead of trying to prevent the UK from employing them, we ought to change the things, which drive them out. It is common knowledge that each skilled person automatically creates jobs for others - often up to 10 for every one. This is true whether the people involved are doctors, lawyers, nurses, teachers, university professors, IT specialists, engineers or even accountants! Once the ten unskilled find new jobs, they in turn often end up supporting 10 dependants each. One is therefore looking at a 'poverty reduction multiplier' of up to 100 for every skilled person who returns to the land of his birth. What is required at the outset is a simple change of perceptions - 'let's be nice to the whitey and let him know he's wanted'. If they can be nice to foreign investors, they can learn to be nice to their own. It won't be easy and a walk down memory lane will tell us why. There's been lots of pain. More follows for Subscribers: The full report is 39 pages. 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