This summer, my daughter started to understand economic life. She’s long known about money, but thanks to a few lessons from Daddy involving chores and allowance, she’s starting to understand where it comes from … and why she has to be careful how she uses it.
These aren’t easy lessons. Even for adults, economic life has a Wizard of Oz quality about it. We can see the results of economic processes and decisions, but the actual mechanisms are complex and opaque — hidden behind a curtain, as it were. That’s why we rely on modern wizards — economists and market analysts — to interpret them for us.
But even “wizards” can be wrong. That’s why it’s so useful to research specific economies yourself. It gives you the ability to discern good investment advice from bad, regardless of what economists and market analysts may tell you.
So let’s do just that, using as a case study an economy I know better than most … South Africa.
Before I get into South Africa, let’s go over how an economy develops.
The best short- to medium-term investment returns invariably come from economies the media calls “underdeveloped.” They mean that as a slur, but that’s precisely why you’ll make real money in those places.
National economies are like people. When they’re just getting started, they grow rapidly, as unused resources of labor, materials and ideas are brought into action. Growth can be rapid and self-reinforcing — if whoever’s in charge of the economy makes the right decisions — as wage-earning citizens increasingly consume the things they produce at their jobs.
When an economy has brought most of its latent resources online, growth slows a bit, but becomes more stable. Its main drivers become population growth and increased productivity, as new and better technology is adopted, often copied from abroad. That’s where the Chinese are today.
When an economy reaches “maturity,” growth tends to slow to a stable long-term rate of 2% to 4% per year. Again, if decision-makers make the right calls, that can be at a high standard of living. Countries like Switzerland don’t grow very fast, but they don’t need to, since their residents enjoy high real incomes.
If the powers-that-be make bad or selfish decisions, however, this process can be disrupted, leading to stagnation.
For example, many African and Latin American economies suffered during the 20th century because their colonial rulers had designed them for narrow commodity exports, not balanced growth. Middle-income countries like India struggled because their crony-controlled governments blocked foreign investment, preventing the importation of productivity-enhancing technology. And the U.S. today is stagnating because the political and economic domination of the financial sector steers investment toward short-term Wall Street paper profits, not long-term Main Street real prosperity.
A Growth Spurt, Way Down South
Most people know South Africa through one of several stereotypes. It’s a safari paradise straight out of Mutual of Omaha’s Wild Kingdom. It’s a mining powerhouse, pulling tons of gold, platinum and other metals from deep in its earth. It has lots of strikes. It’s crime-ridden and somewhat violent.
Well, it’s all those things … but it’s also on the cusp of a major growth spurt driven by increasing consumer real incomes. When I visited my investment property near the beach in Cape Town in December, I was astounded at the transformation since my last visit a few years back. Previously derelict buildings were now upscale restaurants. Thriving foodie and craft markets occupied once-vacant warehouses. And almost everyone bore the signs of a Western-style consumption economy … iPhones, brand-name clothes and fast food.
So when Jeff Opdyke told me that South African franchising conglomerate Taste Holdings had acquired the license to open full-format Starbucks stores across the country, I wasn’t the least surprised. I’d been predicting this for years. Apartheid badly distorted the economy and the labor force, but a new generation of South African consumers born after that era is finding its feet … and its wallet. The country is finally entering the middle phase of economic development, when imported technology and business practices start to drive faster growth.
A Diamond in the Rough
It’s certainly not all wine and roses in South Africa. The country has problems with electricity supply, industrial unrest, and unhealthy concentration in certain sectors, most notably finance (just like the U.S.). It is over-regulated and hard to start a business. Unemployment is still high, and many South Africans will never have formal jobs. Economic growth is lopsided, with a new middle class growing out of — and away from — a larger pool of poor households.
But none of that will stop rapid growth in certain sectors associated with the country’s growing middle class. Nobody spends millions on a Starbucks franchising license unless they know enough consumers are out there to buy Café Vanilla Light Frappucinos.
So in spite of what you may hear mainstream media say about “underdeveloped” economies, their potential for growth is precisely why they are an investment opportunity. Large corporations know this, too. And when big companies invest in an offshore market, that’s your signal to follow suit.
Offshore and Asset Protection Editor